Cashless Envelope System: Ultimate Guide Without Cash

If you’ve read about the cash envelope system for budgeting, you recognize the genius in its simplicity. 

The cash envelope system championed by Dave Ramsey makes your budget come to life visually and tactile. It helps you see your budget at work and how much money you have to spend with the help of envelopes and cold, hard cash. 

The basics are this: you use one paper envelope per budget category. On payday, you get cash and stuff each envelope with the money earmarked for that category. When the envelope is empty, you stop spending. 

Simple, right? Well, yes and no! 

The truth is that a few things make the cash envelope method clunky. 

First, most of us aren’t used to using actual dollar bills and coins. Secondly, many stores prefer cards over cash. And third, most of us get paid by direct deposit, and going to the bank every payday to get some money for our budget isn’t very convenient. 

The cash envelope system isn’t as easy to use as the debit and credit cards that we are all used to. 

But there is no need to throw the baby out with the bathwater! The cash envelope system has helped many people stay on track with their budgets. 

To overcome the clunky parts of the cash envelope system, I found an alternative option, a CASHLESS envelope system for budgeting.

Is a cashless system still effective? (using a debit card, not a credit card)

If budgeting by envelope is to rein in your budget with actual segmented cash, won’t debit cards defeat the whole purpose? 

The answer is no. If you spend some time choosing a method and getting it set up, a cashless envelope system for budgeting can work just as well as a standard envelope system.  

A cashless debit card system is not only doable; it is simple and effective once you start it.

I will teach you the ins and outs of keeping all the best parts of the envelope system for budgeting using cards instead of cash.  

How to set up a cash envelope system

First, you need to understand how to set up a cash envelope system (the same for physical or cashless envelope systems). You can skip this section if you already use the cash envelope system for your budget. We will get down to the cashless part next.

Create a budget:

Start by creating your monthly budget. We use a zero-based budget in our household. Our budget planning started with writing down our take-home pay and subtracting fixed expenses. These can be car payments, utilities, rent or mortgage, and financial commitments like credit cards or student loans. 

We then assign every remaining dollar a job by allocating it into our budget categories, including grocery, savings, Christmas sinking fund, transportation, and debt payoff (and others). In this post, I share 139 budget categories you should consider when creating a zero-based budget. 

When you finish creating your budget, your take-home pay minus your expenses should equal zero. Giving every dollar a category and job offers you complete control over where your money is going.

Set up your envelopes:

The next part of a cash envelope system is to create your envelopes. You want a place to hold the specific amount of physical cash you decided on for each budget category. You can use actual envelopes like these. I also love physical envelopes or wallets and share some of my favorite options in this post. If you are more interested in the cashless envelope option, I will share how to set up your envelopes for different categories in the next section. 

Pay your bills first:

When using a cash envelope system, the first thing to do after each payday is to pay all your bills.

Stuff your envelopes:

 Use the remaining cash in your budget and distribute the predetermined amount to each separate envelope (budget category). As you spend money, use the funds from the appropriate envelope. For example, if I budgeted $400 for the grocery store each month, I would have one envelope labeled groceries and put $400 cash inside. (read below for the cashless instructions). 

Your spending limit on that category must stop once the money is gone from an envelope. 

At the end of the month, the best way to make the system work is to evaluate your budget, see how much cash you have left, and make necessary adjustments. 

Move the unspent cash from your envelopes into savings, use it to pay off debt, or roll it over to your next month’s spending.

How to set up a cashless envelope system 

The same basic principles apply to a cashless envelope budgeting system. You still have specific amounts assigned for each budget category, but instead of using actual cash or envelopes, you will be using paper/electronic banking and debit card(s). 

1)There are two options for a cashless envelope budgeting system: All of the money for your “envelopes” will be located in one checking account and accessed using the same debit card. 

Your “envelopes” will exist in name only. Using a notebook, index cards, or your phone, you’ll track how much money you have spent from each category. Tracking requires vigilant work to keep your spending tracked and current. 

This Budget Book would work great!

OR

2) Create a checking account for each budget category and have your direct deposit automatically distribute your paycheck into the appropriate accounts. 

Setting up direct deposit requires some upfront work (and the bank teller might look at you funny). This method is helpful because you can use category-specific debit cards for online purchases and automatic payments. 

Although you might have eight different accounts for our categories, you only need to carry around three debit cards each (groceries, business account, and personal account). 

Use your bank app to check how much money you have in each account, or you could also use paper or your phone to keep track of your spending. 

If you are unsure which method of the cashless envelope system will work best for you, I recommend first trying option number one (with one account and one debit card). 

If you have trouble with the tracking or would like the added convenience of setting up automatic bill pay, try option number two (multiple checking accounts). 

The beauty of the envelope system is that there are many different ways to do it. You can try all of them until you find a fit that helps you stay on budget the best!

Pros of the cashless envelope system

There are definite benefits to using the cashless envelope system: 

• You don’t need to go to the bank every payday to get cash out of your bank account
• No worries about forgetting the correct budget envelope
• Spouses don’t have to split some money for overlapping categories like groceries or gas
• Cards are accepted nearly everywhere 
• You can use debit cards to set up online automatic bill pay for recurring bills
• There are even now cashless envelope trackers that are a great way to track your virtual envelopes to make sure each expense category has enough in it

Cons of the cashless envelope system

However, the cashless envelope system isn’t all roses and rainbows. Some cons of the cashless envelope system include the following: 

• The initial setup will take time (especially for the multiple account/cards option)
• It is harder to keep track of money spent when using paper
• The potential to overspend is more significant with cards instead of actual cash that you can see and touch

Who should not use a cashless envelope system

Beginning Budgeters:

If you start with budgeting, I recommend using the standard envelope budget system until you get the hang of things. 

There is something about seeing your money in envelopes (or lack thereof) that helps reinforce the need for this strict budgeting method. 

If, after a few months, you want the convenience of a cashless system, you can switch over. You’ll already have your budget categories created, so it should be easier. 

Overspenders:

The cashless version of the envelope system is not a good choice for overspenders UNLESS you are very detail-oriented and vigilant. Most debit cards have overdraft protection, so it could get expensive if you aren’t careful to stay within your budget. 

Final Thoughts on the Cashless Envelope Budget System

The envelope budget system is a great strategy to get the pulse of your spending habits and work towards your financial goals. It puts you in the driver’s seat of your spending instead of in a reactive position. 

I love how it helps you keep close tabs on your spending and learn to stay healthy within those boundaries.

A cashless envelope budget system is a modernized version of this original genius idea. If digital tracking is more your style, you will appreciate the simplicity and ease of using debit cards instead of carrying several envelopes with cash inside. 

Suppose you are interested in using a cashless envelope budget system. You can do this! In that case, I hope this post has given you a basic understanding of using an envelope system and some creative cashless methods for executing it. 

And if you need some extra help, be sure to check out my financial coaching services. I’m ready to help you succeed on your financial journey step by step.