Cash Envelope System - Explanation & Tips

Updated · Apr 22, 2022

With the cash envelope system, you can take control of your finances.

This simple budgeting method can help you avoid debt, track your spending, and save money.

Here’s how it works.

What Is the Cash Envelope System?

The cash envelope system is a budgeting method that physically allocates cash to specific spending categories.

You can use envelopes or other containers to organize and manage both variable and fixed expenses.

The idea is simple:

You use cash instead of credit cards or checks to pay for everything. You put money in envelopes and label them with the name of the spending category, such as “groceries” or “entertainment.”

Once the money in an envelope is gone, you can't spend any more in that category. You need to wait for your following income to replenish it.

This system manages day-to-day expenses or for big occasions like vacations or home repairs.

How to Set Up Your Cash Envelopes

The cash envelope method is simple.

You need a little preparation to get started.

Determine Your Spending Categories

The first step of every budgeting method is the same.

Look at your past expenses and determine the essential ones. Then, make a list of the spending categories you want to use for your cash envelopes.

You don’t have to get too granular, but your categories should cover all expenses.

Set a Budget for Each Category

Once you've determined your cash envelope categories, it's time to set a budget for each one.

Ideally, they will cover every penny of your income. Again, base this on your past spending habits.

Of course, you can identify areas on which you can cut back. But don’t set your ideal spending goals.

Make the budget envelopes realistic so that you can follow through.

Withdraw Cash for Each Category

Now it's time to get the cash!

Go to the bank and withdraw the amount of money you've budgeted for each category.

Do this as soon as you get your salary. That way, you won’t be tempted to spend outside of the budget.

Label Your Envelopes

Grab some envelopes (or any other type of container) and label them with your spending categories.

If you’re not fond of DIY crafts, you can find plenty of cheap tailor-made products online.

There are color-coded envelopes with expense ledgers and even a zipper case to keep them all together.

If you want to carry them around, you can use a cash envelope wallet.

Pay For Everything in Cash

When you're out and about, only use the cash from your envelopes. Switching from contactless to cash payments can be challenging at first.

But we assure you, this will help you stay on track with your budget.

Track Your Spending

At the end of each day (or week), take a few minutes to write down how much you've spent on each envelope.

Keeping an accurate record of your spending will help you plan your future expenses.

Benefits of Using the Cash Envelope System

There are several benefits to using the cash envelope method:

  • It forces you to stick to your budget. You're less likely to overspend when you can only use the cash you have on hand.
  • It helps you keep track of your spending. You can physically see how much you're spending in each category with cash. This can help identify areas where you may need to cut back.
  • It can help you avoid debt. Since you're using cash instead of credit, you won't be tempted to spend more than you can afford.
  • It's simple to use. The cash envelope system doesn't require any complicated budgeting software or spreadsheets. All you need is a few envelopes and some cash.

Wrap Up

The cash envelope system is a great way to budget your money and stay on track with your spending.

It's simple to use and can help avoid debt.

If you're looking for a way to get your finances under control, give the cash envelope method a try!

FAQ
What if I Do My Shopping Online?

If you spend some of your money online, you can still use the cash envelope method.

Just set aside an envelope labeled online expenses.” When you buy something online, write down the amount in the envelope.

And don't forget to set a budget for this category too. Otherwise, it’s easier to overspend that way.

 

What If I Run Out of Cash in One of the Envelopes?

The idea of the envelope budget system is that if you run out of cash in one category, you should stop spending until you've replenished it.

Of course, you can also transfer money from another envelope.

However, try to avoid this. This budgeting method is like a diet—it takes discipline. You're one slice away from eating the whole cake.

If you realize you didn’t budget enough for that category, set aside more money for it next month.

How Much Money Should I Carry?

Plan your spending before you leave your home.

Are you going out with friends? Take money from the entertainment envelope. Going shopping? Open the groceries budget category.

You can also carry some emergency money with you. Just don’t be tempted to spend them on something else.

What If I Have Leftover Cash at the End of the Month?

That’s the good thing about the cash budgeting envelopes.

You can decide what to do with the leftover money without feeling guilty you’re spending too much.

You can either roll it over to the next month, put it in savings, or even use it to treat yourself. It all depends on your financial goals.

Is the Envelope System Safe?

Yes, as long as you keep your envelopes in a safe place. If you're worried about losing them, you can use a lockbox.

You don’t need to carry around your whole salary. In any case, it is a good practice to take only as much as you’re planning to spend with you - it helps you strengthen your budgeting discipline (even if you aren't using the cash envelope system) and increases the security of your cash.

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Aleksandra Yosifova
Aleksandra Yosifova

With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.