The Cash Envelope System | Everything You Need to Know
The Cash Envelope System is not new, it’s been around the block–a few times. Why is it still hanging around after all this time, you ask? Well, because it works.
I know in this digital age people tend to crinkle their nose at the prospect of carrying cash. BUT if you are a regular, card-carrying member of the Budgeting Struggle Bus, this system is for you!
What is the cash envelope system?
The cash envelope system is a way to visualize and maintain your budget. In your budget, you will have categories of spending. Some or all of those categories will have an envelope.
Whether you decide to move to a complete cash system or a mixture of cash and digital is up to you.
Inside the envelope, you will place the cash you need (that you have previously budgeted) for each category.
During the month you will use those envelopes of cash to pay for items from each category.
The idea is to use the cash to help you stay on budget in each category and not to overspend.
How does the cash envelope system work?
Step One: Have your budget in place with your list of expenses.
The envelope system isn’t a budget so much as a vehicle to carry out said budget. You can stuff money in twenty-five different envelopes, but if you don’t even know if you are able to cover your monthly bills (mortgage/rent, utilities, etc.) it’s not going to do you much good.
So, if you’ve not done that yet, go ahead and knock it out.
Step Two: Organize your spending between cash envelopes and electronic payments.
Please know that budgeting is a little art and a little science. You’ve got a fixed income. You probably have a handful or more of fixed bills and then some flexible spending space for the rest of your expenses.
The envelope system is to help you keep control of that creative gray area, the non-fixed expenses.
SIDE NOTE: Some die-hard Dave Ramsey envelope system budgeters will argue to pay everything in cash. I’m of the opinion that things like your mortgage or car payment are regularly occurring fixed expenses. And these types of expenses aren’t usually the ones that cause overspending in your budget. So, why add another layer of pain to the process by forcing these types of expenses to be paid in cash, but you do you.
Sample cash envelope categories:
- Eating Out/Coffee
- Entertainment (Movies, Books, Concerts)
- Household items
- Fun Money (an allowance for you to blow on whatever)
- Bus/Train/Parking expenses
- Dry Cleaning
- Medicine/ Medical (prescriptions or co-pays)
Step Three: Divide Your Cash into weekly Envelopes for the month.
I am a HUGE fan of having a weekly budget! Chances are if you are having to exert this much control over your spending habits to adopt a cash budget, then it’s going to be hard for you to keep a month’s worth of cash from disappearing before the month is out.
In my house, I have the envelope for the month tucked away in my house, but I only carry the weeks budget for each category in my wallet.
Step Four: Keep track of your spending.
The beauty of this cash-only system is that it helps you eliminate overspending. When the money is gone, it’s gone.
With that being said, that doesn’t mean there isn’t room for improvement in your budget. When you look back over your month and wonder, “Where did my money go?” You can look back and see exactly where you’re money went!
Step Five: Evaluate Your Spending at the End of Every Month.
Once you know where you’re money went, that can then be the jumping off place to see where you can start tightening the belt.
The first two months after starting this, I couldn’t believe how quickly we were spending money from out coffee/eating out envelope.
This realization led to me making more deliberate choices about being better prepared with snacks on hand. Investing in a great coffee thermos and more.
The end of the money is also where we decide how we are going to allocate any unspent cash. Are we throwing it at debt? Are we adding to our vacation fund? Saving for a new car? Sinking fund? Emergency fund?
Cash Envelope System Pros and Cons
- Control of Spending: When the cash is out, it’s out.
- Easy to set-up: What could be easier than writing a label and dollar amount on the outside of an envelope and that’s all the money you get.
- Easy evaluations of category spending: Because your envelope is its own category and you are tracking on the envelope itself, you can quickly see how you are doing in each category. Plus no need for tedious budget tracking software where you have to wade in and change each individual transaction to see how you spent your money.
- No need to obsessively track your checking account balance: Do you ever find yourself checking your checking account balance daily to see how much money you have? Since you are pulling the money out ahead of time, you already know how much money you’ll be using and whats left no matter how far you are into the month.
- No overdraft fees: Since you are paying cash, there shouldn’t be any unexpected surprises showing up in your checking account.
- The money feels real: Did you know studies have shown that you spend less money when you spend cash? I absolutely believe this. I know its much easier for me to swipe my card for little purchases here and there than it is when I had a $20 on Monday and by Wednesday I’m staring down into my wallet and I’ve only got $11 left.
- Borrowing from categories: If you find yourself with too few funds in one category you have the ability to move money from one envelope to another, but still keeping your overall spending at the same budgeted amount. Example, you have company coming over which pushes your grocery budget over by $20. Well, you can push $20 from your fun money envelope to compensate. Whereas before this system, you would probably maintain the same budget for the other categories and just accept the overage in groceries, this way you can still stick to your overall budget.
The Potential Issues
- If you lose it, it’s gone. Let’s say something happens to your purse and all the cash that is inside it. There’s no way to recover that cash- if it’s gone it’s gone.
- You have to physically go and get cash. While a trip to the ATM might not seem daunting. Consider that it won’t necessarily be as simple as going to get a few hundred in $20’s once a month. What happens if your fun money is $30. How are you going to split up those $20’s then? You have to be more deliberate with planning out how you need to take your cash.
- A tough learning curve at the beginning. Let’s say you shop at Walmart and on one trip you buy across multiple categories. Where does the money come from then? Are you shifting money from home care into the groceries because you had to buy cleaning products?
- Multiple people spending from one envelope? What happens if you and your spouse/roommate/child do the grocery shopping? Who carries the envelope? Do you split the cash? How do you account for that?
Cash Envelope System Tips
- On hand cash cheat sheet. Make a cheat sheet for how you need to take your cash every month. It will save you lots of time and aggravation when you are trying to set up all your envelopes every month.
- Make separate envelopes for your spouse. If you are married and you both share shopping responsibilities, instead of you shuffling one envelope back and forth, figure out (roughly) percentage wise who does how much shopping and split it accordingly. It will take a little time to fine tune it, but this is a great place to start.
- Make a consumables category. One workaround to minimize confusion with similar categories like household expenses and groceries is to lump them into a category like “Consumables”. This is helpful if you tend to do a lot of one-stop shopping at places like Costco, Target, Walmart, etc.
- Pay separately. Another option for mixed categories in one shopping trip is separating items by category. All the groceries at the front. Make that one transaction and pay for it. Household items next- pay for those as it’s own transaction, etc.
- Fun Money. Make sure you allow for some sort of fun money for yourself. It is really hard to stay the course when you’ve gone from a more liberal budgeting strategy to something like this which is a little more unforgiving. Even if it’s just a once a month Starbucks. That one small reward can help keep you motivated.
- Pay yourself on payday. You will have the most success with keeping to your budget if you pay yourself (fill up your envelopes) right when the money hits your account. It gives you little time to stray too far from your budget or for money to start disappearing from your account.
- Online Shopping. If you, like me, do online shopping– how does that fit into this system? One option that seems to work is paying into another envelope to deposit to cover the expense. I labeled my “bank deposit” (so original, I know!). Online shopping is a slippery slope if you don’t plan on how to handle those kinds of expenses, they can get missed.
Cash Envelope System Alternatives
- Utilize a coupon organizer: If envelopes aren’t really your style, you can get a coupon organizer for a few bucks from Walmart and Target. It accomplishes the same thing by splitting up your money. The only downside is that it doesn’t offer the handy ability to be able to write the expenses down and track receipts all in one together.
- Using binder clips: If you are not a fan of envelopes, you can accomplish the same thing by using binder clips that you’ve labeled. You can even include a slip of paper to keep track of your expenses. Dana Ryan has an entire blog post about how she uses Binder Clips instead and I quite liked this as an alternative idea!
- If you just CAN’T with carrying cash: you could spin this system to satisfy electronic payment by still carrying the envelopes, but when you pay, writing (and tallying) the expenses as they happen and then tucking the receipt inside. My word of caution with this is that you don’t have the sort of protection of overspending that you would if you were dealing with cash.
- Envelope budgeting apps. There are budgeting envelope apps, like Mvelopes, or Goodbudget but there’s a fee associated with it and you don’t actually have paper envelopes, you have virtual ones.
I would love to hear about your experiences with the cash envelope system. Please comment below with how it worked (or didn’t)!