One of the things that hold people back from budgeting how difficult it can be. Between bank accounts, spreadsheets, and apps, sometimes keeping track of all those numbers is enough to make you want to quit.
The cash envelope system is a budgeting hack that is simple and effective. It takes the abstract idea of budget categories and makes them tangible and easy to track.
Although the cash envelope system isn’t a new concept, it is a very helpful budget management strategy. If you are considering trying out the cash envelope system, read on to learn the advantages, disadvantages, and why you should give this budgeting strategy a try.
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What is the Cash Envelope System?
The cash envelope system is a budgeting strategy that allows you to track exactly how much money you have in each of your budget categories by keeping your cash stored in actual, physical envelopes.
It first requires a budget, which I share more about in this post as well as specific spending categories.
You can use envelopes to budget your fixed expenses and variable expenses but most people only use them for variables because that’s where they tend to overspend the most.
For example, you don’t need an envelope for your car payment because you probably won’t overspend there.
This budgeting system can be for your entire budget or just for a category that you regularly overspend on. On payday, you cash your check and put the exact amount of money for that particular category(ies) in an envelope.
If your “Eating Out” budget is $40 a month, then every time you spend money on restaurant food you only use what’s in that envelope.
Once you’ve used all $40, you are done eating out until next payday. This will force you to be strict with your spending and stay on budget.
It’s super easy and simple – at the end of the month, if you have money left in an envelope, you can roll it over OR put it into savings.
Why Do People Use The Cash Envelope System?
This system made famous (but not invented by) Dave Ramsey is a way to gain control of your spending and get out of debt.
People who are trying to budget their money in order to live within their means use this type of system because it helps them manage their spending habits and stick to a predetermined amount for each day of the month.
The system of budgeting money in order to live within one’s means is a crucial tool for those who are dedicated to living responsibly.
The best part about this type of planning is that it provides an opportunity not only to predict future expenses but also to see how well you’ve managed your finances and spending habits by the end of each month.
It’s important to remember that budgets go hand-in-hand with common sense.
Because there will be days when emergencies happen (which could result in unexpected expenditures), these types of issues should always be planned ahead so they don’t have any major impacts.
Recommended: Simple DIY Cash Wallet Dividers (Free Printable)
How the Budget Cash Envelope System Can Stop Overspending.
When you are using the cash envelopes for budgeting purposes, you are giving yourself the freedom to spend until it’s gone. There is a bottom to the food bucket. When you reach the bottom, you’re done until the bucket has been refilled.
Like children, adults also thrive with structure. Being able to spend all willy nilly without structure and restrictions makes for spontaneous and overly rambunctious spending practices.
Understanding that you only have $100 for beauty this month means you may have to choose between new highlights OR a pedicure…not both. Understanding will stop you from overspending.
You also have to be willing to make a commitment to the process. It doesn’t mean that when you want something and the cash is gone that you steal from another envelope or worse… pull out the credit or debit card to satisfy your urge for Pad Thai.
Advantages and Disadvantages of the Cash Envelope System
Just like any budgeting method, the cash envelope system comes with its own pros and cons. The key to sticking to a budget is finding a method that makes sense to you and that you will be able to sustain.
The cash envelope system is simple and easy to use. You know exactly what your budget is for each month. You learn how to live within your means and you can categorize your spending habits.
6 Advantages Of The Cash Envelope System
The cash envelope system forces you to be strict! No overspending, no justifying purchases. And if you like visualizing how much money you have left, rather than using a card for everything, get your envelopes ready and head to the bank.
You can see when you are out of money. Literally! Take a glance in an envelope and you can see that are out of money in that category or are close to it.
Won’t go over budget because you can’t. There is no wiggle room here. You have the cash to spend on specific things. Unlike budgeting online, the cash envelope system helps you stick to a budget by eliminating the temptation to spend more because, well you can’t!
Helps you see how realistic your budget is and modify it. If halfway through the month you are out of money for a specific category, or on the flip side, if you have loads of extra cash you aren’t using, then your budget needs to be adjusted. You can easily see what is working and what needs fixing.
Easier to save money. Since you know how much money you have, you can’t spend more than that. You can’t lose track throughout the month or forget to see how much is left in your budget; it is all right in front of you.
Plus, since you can see how much cash you have left, you’ll be more cautious with your spending. There’s nothing scarier than having a few weeks until payday and no money left to spend.
The cash envelope system makes you very aware of your remaining budget and therefore a more cautious spender. That caution often results in extra money left over each month that you can then put in your savings account.
The system is flexible. Regardless of your age or financial situation, this budgeting tactic can help you manage your spending. It allows you to accurately track and visualize your daily expenses. You start out knowing how much you’re planning on spending and can physically see how your budgeting is going.
Envelopes reduce the risk of impulse purchases. These envelopes require all transactions to be planned ahead of time. That means fewer unbudgeted purchases, out-of-the-blue treats, and spur-of-the-moment trips.
6 Disadvantages of the Cash Envelope System
The cash envelope system comes with its downfalls. If an emergency comes up, and you don’t have your envelopes of cash with you – you’re out of luck (or you just have to go home and get them).
As simple as the budgeting strategy seems, make sure you understand the inconveniences that come with it before you run out and put all your money in labeled envelopes.
Takes time to get cash and separate. The cash envelope system takes time. And unless you have piles of cash lying around – you have to go to the bank every month and take out the money you need. Plus, you have to separate the money into categories and put them in each envelope.
Not every store takes cash. Over the past year, more stores have transitioned to be “cash-less.” If all of your budgets are in physical dollar bills, you might not be able to purchase products from certain stores.
Eliminates the convenience of online shopping. If you don’t have time to run to the grocery store and want to order food online – that won’t work with this budgeting system.
All your grocery money is in an envelope sitting next to you. Do the kids need new school shoes? You can’t order those online, either. To the store you go.
The cash envelope system takes out a level of convenience that many of us have gotten very used to.
Hard to separate funds as a couple. It’s hard to have physical cash separated as a couple. Who has all the grocery money? Or the gas money?
Although there are ways around this, like separating your grocery money into two envelopes, the cash envelope system with a couple is more complicated and will take more time.
Harder to track spending. Although it makes it so much easier to know how much you’re spending, it makes it a lot more difficult to know what you’re spending it on.
Yes, you have your grocery envelope…but how often are you using it? And how much are you spending each time?
Unlike the information automatically stored from your debit account including the date of purchase and location, the cash envelope system requires you to manually keep receipts and write things down.
Holding cash can be unsafe. It can be risky to carry around a month’s worth of expenditures. You are more vulnerable to theft and/or losing some (or all) of it.
When you lose a credit card, you can quickly cancel it when you realize it is gone. Unfortunately, the same doesn’t apply to an envelope of cash.
How to Start Using the Cash Envelope System
If you’ve read about the pros and cons and decided you want to give the Cash Envelope System a try, here’s how to implement this strategy.
- Think of your expenditures that need a cash envelope
It’s a good idea to use the envelope system for items that you tend to overspend on. Things like groceries, restaurants, clothing, gas, and entertainment are good places to start. You can also choose to create a cash envelope for every category in your budget.
- Figure out your budget amount for each category
Track your spending for a few months using receipts to see how much you spend in each category. If you know you overspend on gifts and impulse buys, then you’ll want to set your budget amount lower than your actual spending. The same goes for any category that you want to tame your expenses for.
- Create your budget using the amounts you spent/goal amounts
Cut back where necessary and find ways to eliminate spending and increase saving. But of course, be realistic. If you’re spending $200 a month on groceries, don’t budget to spend $50. You’ll be disappointed and out of money (and food!) fast.
- Get cash from the bank on payday.
Don’t be tempted to purchase online before you pull money out. Get the amount of cash you need out of your checking account and in categories as soon as possible.
- Divide cash into proper envelopes
Simple enough, but the amount of money you’ve budgeted to spend in the corresponding envelopes.
- No money=no spending
When you find the envelope for your category empty, stop spending money! Strictly following this rule is very important. If you take money from other categories or use your credit card, it defeats the purpose of budgeting in the first place.
- Re-evaluate and shift money if needed
It’s important to remember that you can (and should) re-evaluate and shift money in your budget categories. If you’re constantly not having enough money for groceries, then budget more.
And if you have leftover money in entertainment, put it into your savings or shift it to a budget category where you need a little more wiggle room.
Can You Use the Cash Envelope System Without Cash?
I have heard people who use the cash envelope system without cash but I wouldn’t recommend it. There are psychological benefits to holding cash in your hands and physically handing it over to pay for purchases. As a Financial Coach, I would discourage using plastic of any kind.
I can’t imagine not using cash. I owe everything to deciding on a cash system.
Recommended: 21 Best Cash Envelope Wallets {Budget Friendly}
What Cash Envelopes Should I Have?
If you’re a beginner, I would highly recommend the following cash envelopes. Pay close attention to the places you tend to overspend the most on and start there.
I don’t use an envelope anymore for gas because I don’t really overspend. Instead, I have a specific account with a debit card attached for gas only. It makes life easier and you can pay at the pump.
- Groceries
- Other food
- Beauty
- Clothes
- Personal Allowances
- Toiletries (or in my case,Target)
Once you have been using this system for a while, you will find other areas that you like having cash on hand for. Kids, for example, and all the fun that goes along with their lives could benefit from a few cash envelopes.
Where To Keep Your Cash
Some people use actual envelopes described above. They will grab their grocery envelope when they are heading out to shop and just use that.
I have seen people who use a Filofax binder zip around planner wallets with pouches to organize their cash.
There are others who will go to the Dollar Tree and grab a coupon organizer to keep with them as they need it. Everyone will find a system that works best for them.
I do not use envelopes in the most common sense of the word. Instead of those basic A6 brown envelope cash envelopes, I went with something a little more special.
Even though it is based on the cash envelope theory, it just doesn’t work for me.
A few people have created these cash envelope wallets that are affordable and fantastic.
How Many Envelopes Should I Have?
Starting out with 3-5 should be plenty in the beginning. The last thing you want to do is overwhelm yourself. Stick with the basics and then add more as you see fit.
There is also an option of the cash envelope wallet. This style of wallet will help you be more organized and spend less time fumbling with envelopes at the checkout.
Final Thoughts On Whether The Cash Envelope System Works…
Budgeting is hard. In a magical perfect world, it would be simple to save money and a breeze to lose weight, but the reality is budgeting will be a process with a learning curve.
Although the cash envelope system has its difficulties, having tangible money in specific categories forces you to be strict and to stick to your budget.
If you don’t want to drive to the bank every week (or every month) and don’t want to deal with the hassle of sorting your money, then the cash envelope system might not be for you.
But if you want a visual, hands-on approach to staying on budget, the cash envelope system just might be the solution you’ve been waiting for.
If you’re looking for a way to get your spending under control and save money, the cash envelope system may be what you need.
The advantages of this system are that it forces discipline on how much is spent each week, as well as offers an easy mental separation between income and outflow.
Some disadvantages include not having access to all of one’s funds at once if something urgent comes up or forgetting where certain envelopes are located (in which case they have to be counted).
I hope these points help you decide whether or not this budgeting method will work for you! For more information about cash envelopes and the cash only lifestyle, check out Cash Only Confidence.