Are you having trouble getting a handle on your spending? If so, you may benefit from learning how to use the cash envelope system.

The cash envelope system is a great way to manage your finances. It gives you control over your money. And it allows you to tell your money where to go. People have paid off thousands of dollars in debt using this system.

In this article, I’ll show you how the cash envelope system works. Then you can start using it in your own financial life. The cash envelope system was a big factor in my debt payoff. It helped me and my wife and me pay off $52,000 in debt in just 18 months.

Is the Cash Envelope System Effective?

There are several reasons why using cash works so well. First, it helps ensure that you are living within your means. It helps you spend within the stated budget amounts you set for each spending category. I think once you start living with this system and paying cash, you’ll find it effective for budgeting. It’s a much more organized way of managing money. And it can help you build wealth too.

As with any new habit, you might feel uncertain at first and want to give up. Keep pressing on! You will quickly develop a new routine. The cash envelope system will seem like second nature in no time.

Here’s how the cash envelope system works:

Start With Your Budget

Using the cash envelope system starts with reviewing your budget. Look at your budget and highlight the expenses that are variable. Variable expenses are expenses that fluctuate every month.

Common Cash Envelope Categories:

  • Groceries
  • Dining out
  • Clothing
  • Entertainment
  • Gas
  • Miscellaneous
  • Kids

These types of expenses tend to vary each month. Therefore, it’s easy to spend more in these areas than you budget for. The cash envelope system will help you to gain control over spending. You’ll find it easier to make changes in your variable spending categories.

Use Personal Capital to analyze your spending activity for free!

Make Envelopes Labeled with Each Spending Category

Grab an envelope for each variable spending category. Write the name of each category on separate envelopes.

Some people write the amounts of each transaction during the month on the envelopes too. If you think that would be helpful, give it a try. It might be beneficial for you to see where your cash is going each month. This way you can make adjustments to your spending if needed.

As for us, we just write the total amount of cash that goes in the envelope. We use it as a quick reference for how much money to put in every month. Either way works. It’s a matter of finding which way works best for you.

Stuff the Monthly Cash Amounts in the Envelopes

Add up the total cash that you’ll need to fund all of the envelopes for the month. Next, go to the bank and make a cash withdrawal for the total amount. Your budget dictates how much cash you need to put in each envelope. For instance, if you have budgeted $300 for groceries, then put $300 in the “Grocery” envelope. Then do the same for each of the categories you’ve created.

Only Use the Money in Each Envelope for That Category

This step is key to success with the cash envelope system. For example, it can be tempting to use money from one envelope for different expenses. Let’s say you’ve run out of entertainment funds. You may want to use grocery money to fund a night out. However, if you do so you may find yourself short on grocery money for the month.

Using the system successfully will take some trial and error. It will take discipline to use the money in the envelopes for what you’ve designated it for.

You might come to realize that the budget you’ve set for a given category isn’t realistic. If this happens, discuss it with your spouse. Consider adjusting the amount for that category. My wife and I have a budget meeting almost every month. We go over our finances together as a couple. I recommend doing so for your family too.

If you don’t have a spouse, find someone who’ll help keep you accountable. Choose someone who will help you stay on track and who you trust. Meet with them at least once a month to go over your finances. Discuss how you’re doing on spending and goal achievement.

Have a Goal in Mind

When using the envelope system it can be helpful to have a goal in mind. My wife and I started using the system to learn to manage money better. We wanted to do that so that we could pay off our $52,000 in debt.

At the end of each month we’d have some money left in some envelopes. We took that extra cash and put it toward our goal: paying off debt.

We’re debt free now so we use leftover money for other goals. For instance, we use it toward paying off our mortgage early. Keeping this goal in mind helps us stay motivated. It keeps us from overspending and helps us stay within our budget.

Tips to Stay Motivated

For anything in life to be successful, you need the motivation to reach your goal. Set periodic goals and milestones for yourself. Do this even if it seems as though the goals are unreachable. Take steps to reach each goal. Celebrate your progress so you don’t grow complacent or give up. After all, life isn’t all work and no play. You need to find balance with your finances and every aspect of life.

Here are some ideas to keep you motivated while enjoying the fruits of your labor:

  • Have a “date night” outside the home every three months instead of every month
  • Rent a movie
  • Take a day trip every six months
  • Host a party for family and friends (just because you can!)
  • Start a new hobby

The envelope system helps you practice delayed gratification. This is important in a world of instant gratification. Adjusting your spending mindset doesn’t mean you need to forsake your fun habits entirely. You can still enjoy them in moderation. Celebrate when you’ve achieved your spending goals for a few months. Go out and do something fun.

Here’s an example. You might be used to spending $100 a month on a single date night with your spouse. Change that so you do an expensive date night once a quarter. For the other months, stay in and have fun. Or do something for free in town instead. You’ll see that you can have fun without spending money.

Common Questions About the System

Yes, it can be nerve-wracking to do things differently. Using the cash envelope system in place of a debit or credit card is no different. Here are some common questions and fears that people have about the system. I’ll share what we’ve learned regarding the answers.

Do I Need an Envelope For Every Spending Category?

For best results, create an envelope for every spending category.  If you currently pay for it with a credit or debit card, make an envelope. As a brief refresher, common cash envelope categories are:

  • Groceries
  • Dining out
  • Clothing
  • Fun Stuff
  • Gas
  • Kids
  • Online Spending

For online spending, transfer the money from your checking account to your online spending envelope. Do you shop online with a credit card? Debitize will automatically withdraw the cash from your bank account. It’ll put the money toward your credit card balance.

Every person has a different financial situation. This means you can add additional envelope categories from the ones I mentioned above. Some of these categories might include charity or auto maintenance. Or you can make envelopes for large savings goals. Think a family vacation or a replacement vehicle.

Read our tips to help you determine your budget percentages.

You might make envelopes for the following categories:

  • Housing
  • Utilities
  • Insurance
  • Taxes (Unless you’re self-employed and don’t pay in during the calendar year)

Isn’t it Dangerous to Carry That Much Cash Around?

To minimize risk, we keep our cash envelopes at home. We bring them with us if we know we’re going to need them on a given day. Or we take a small amount out of an envelope if we know we’re going to spend in that category. No rule says you’ve got to carry all of your cash around. Just because you have it doesn’t mean you need to carry it.

Also, it’s always good to practice safety measures when carrying cash. Be safe no matter what form of valuables you have with you. This is true whether it be cash, debit cards or credit cards. People can steal your debit or credit cards just as easily as they can your cash. So, it’s important to keep your wallet or purse on you at all times. Be aware of your surroundings too. Watch for people who act suspicious.

Is the Cash Envelope System Complicated to Use?

If you can add, you can use the cash envelope system. Most people have simple dollar amounts they set in their budgets for flexible spending items. This is so the math is simple for the cash envelope system.

Having your money in one place is the easiest way to track your spending. You need to dedicate just a few minutes each month to make the system work.

How Do I Track My Spending With the Cash Envelope System?

The envelope system is a process of trial and error at first. Soon, you’ll figure out how much you spend each month in each category. If you don’t run out of cash mid-month it’s still smart to track your spending. Tracking your spending can help you spend less money each month.

You could try one of the following methods to track spending:

  • Write each purchase on the envelope
  • Log every transaction by hand in a money journal
  • Create a Microsoft Excel or Google Docs spreadsheet
  • Use a budgeting app

Use the option that’s the easiest for you to record each transaction. It’s critical to know how you spend every dollar to optimize your spending.

There are dozens of ways to save money on your most common expenses!

Where Will I Get That Much Cash?

Simply take the money out of your current paycheck via bank withdrawal. Do as you normally would when you budget for flexible spending items. It might seem as if you’re spending a big sum of money all at once. However, but the truth is you are transferring the cash to another source. And that source is your envelopes.

What if I Want to Spend More Than I’ve Budgeted For?

There is some discipline involved with using this system. However, isn’t that why it’s so successful? You’re welcome to go over your allotted budget amounts and spend more in categories. But keep in mind that additional spending will affect you. It will put you further away from reaching your financial goals.

Are you regularly going over your budgeted amount in a category? Try sitting down and working to figure out what the problem is. Have you possibly budgeted too low of an amount for a category? Or is it simply a discipline problem?

Finding the answer to those questions when they come will help. You’ll learn to budget in a way that meets your or your family’s needs. And in a way that will keep you on track for meeting your financial goals.

Can I Use the Cash Envelope System Without Cash?

More people are banking online these days for convenience. But that doesn’t mean you can’t use the cash envelope system. Yes, this system is ideal if you work with cash. You can take the cash out at the ATM and divide it up accordingly. But, you still have a couple of different options if you want to bank online.

When you bank online exclusively, look for a bank with the following features:

  • Sub-Accounts (You can divide each deposit into different “digital envelopes”)
  • Free ATM Withdrawals
  • Bill Pay

Some banks let you cash checks online which is super convenient. But what if you just don’t want to use cash? You can still use the cash envelope system in a digital world! 

Creating sub-accounts within your bank account is one way to create digital envelopes. With every deposit, you transfer money to each sub-account. You also have the option to pay your bills online. Or you could use debit cards for each account. Just make sure you log your transactions onto a register. This way you’ll be sure you don’t overspend.

If your bank doesn’t offer sub-accounts you do have other options. For instance, you can use Mvelopes to create digital envelopes. You can link your various online accounts and create unlimited envelopes. Mvelopes imports your transactions and monitors your account balance. This way you know where you stand financially at any time.

Can I Use This System If I Earn a Variable Income?

Budgeting on a variable income can be frustrating. But, using the cash envelope system can help live with a variable income. It’s an excellent way to help you live within your means. You might not know exactly how much you’ll bring home each month. But you’ll have a good idea of how much you’ll spend.

Cash envelopes help ensure you don’t overspend in any single category. Star by comparing your average monthly earnings for the last six to twelve months. Use your lowest earnings month to create your budget.

If possible, try to keep your spending limit below your lowest earning month amount. This way, you’ll have a built-in financial safety net. And you’ll have extra money each month you earn more.

You can use this excess money to make extra debt payments. Or you can place it in your high-yield savings account.  It will be there to make ends meet during the slow months.

Can I Still Earn Cash Rewards with the Envelope System?

Absolutely! A rewards credit card isn’t the only way to get cash back on every purchase. You can earn rewards by scanning grocery receipts every time you visit the grocery store. Some stores -especially gas stations- offer cash customers a discount. This is because the retailer doesn’t have to pay credit card processing fees.

For your online purchases you can use a cashback app like Ebates. Ebates can help you get up to 40% back at your favorite online stores. It doesn’t matter whether you pay with debit, credit, PayPal, or a digital check. Ebates gives you credit for your purchase amount.

You can use your earned cash rewards for your unexpected expenses. This way you won’t have to pull from your cash envelopes. Maybe you can use these rewards to pay for your date night too!

Have you considered using the cash envelope system to help you achieve your financial goals? If so, what were your results? Would you recommend the system to others? What other tools help you stay on track with your budget? Share in the comments section. 

It's a lot easier than I thought!

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