If you’re having trouble getting a hold on your spending, you will likely benefit from learning about and using the cash envelope system. The cash envelope system is a great way to get a hold of your finances. It gives you control over your money and allows you to tell your money where to go. Many 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 so that you can start using it in your own financial life. Using the cash envelope system was a big factor in helping me and my wife pay off $52,000 in debt in just 18 months.

Is the Cash Envelope System effective?

One of the reasons using cash works so well is that it helps ensure that you are living within your means and within the stated budget amounts you set for each spending category. I think that once you start living with this system and paying cash, you’ll find it a much more organized way of managing money and building wealth. Here’s how the cash envelope system works.

Start With Your Budget

Learning to use the cash envelope system starts with reviewing your budget. Looking at your budget, highlight the expenses that are variable; that is, expenses that fluctuate every month.

Common Envelope Categories:

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

Since these types of expenses have the tendency to fluctuate each month, it’s easy to spend much more in these areas than you budget for. The cash envelope system will help you to gain control over fluctuations in your variable spending categories.

Make Envelopes Labeled with Each Spending Category

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

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

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

Stuff the Monthly Cash Amounts in the Envelopes

Add up the total in cash that you’ll need to fund all of the envelopes for the month, then go to the bank and make a cash withdrawal. Your budget should dictate 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. After you withdraw the money from the bank, take the budgeted amount of $300 and put it in the envelope labeled “Groceries”. Then do the same for each of the different envelope categories you have 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 the grocery category to go to the movies once you’ve run out of entertainment funds, however, then you will likely not have enough money left to eat for the rest of the month.

Using the system successfully will likely take some trial and error. It will take some discipline to use the money in the envelopes only for what you’ve designated it for. If you come to realize that a budget set for a given category isn’t realistic, discuss it with your spouse and consider adjusting that category. My wife and I have a budget meeting almost every month to go over our finances together as a couple and I highly recommend you do too.

If you don’t have a spouse, consider finding an accountability partner. Find someone who is going to help you stay on track and that you trust. Then meet with them at least once a month to go over your finances to talk about how you’re doing on spending and goal achievement.

Have a Goal in Mind

When you are using the envelope system, it can be extremely helpful to have a goal that you are trying to attain. When my wife and I started using the system, we were using it as a tool to help us manage our money better so that we could pay off our 52,000 in debt.

As a part of our goal, we would take any extra cash that we had left over at the end of the month in the envelopes and put it toward our goal: paying off debt. Now that we have paid all consumer debt off, we use any leftover money in the envelopes each month to make extra payments on our mortgage. Keeping this goal in mind helps us to remember why we don’t want to overspend and gives us motivation to stay within our budget.

Common Questions About the System

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

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

In order to minimize risk, we keep our cash envelopes at home unless 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 on a day. There’s no rule that says you’ve got to carry all of your cash around just because you have it in your possession.

Also, it’s always good to practice safety measures no matter what form of valuables you have with you, 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 and to be aware of your surroundings.

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 that they set in their budgets for discretionary spending, so even the math is simple for the cash envelope system.

Where Will I Get That Much Cash?

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

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

There is some discipline involved with using this system, but isn’t that why it’s so successful? You’re welcome to go over your allotted budget amounts and spend more in categories via your debit or credit card, but just keep in mind that any additional spending outside of your budgeted amounts will put you further away from reaching your financial goals.

If you find you are continually going over your budgeted amount in a category, it might be a good idea to sit down and figure out what the problem is. Have you possibly budgeted too low of an amount for that category, or is it simply a discipline problem? Finding the answer to those questions when they come will help you to budget in a way that meets you and/or your family’s needs and will help keep you on track for meeting your financial goals.

Have you considered using the cash envelope system to help you achieve your financial goals?

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