Everything you need to know about the cash envelope system

If you’ve ever heard of Dave Ramsey, then you’ve probably heard of the cash envelope system.

Many of you are probably wondering, will cash envelopes help me manage my money? Are cash envelopes the best system to control spending? Can this system really help me take control of my debt?

Regardless of wherever you are at in your financial journey, you need to manage your money. The envelope system is one of many that can help you if you’re living paycheck to paycheck or paying off debt.

Luckily for you, I’m going to tell you everything you need to know about the cash envelope system. You’ll be able to decide if the cash system is the best fit for you and your family.

Everything you need to know about the cash envelope system3

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What is the cash envelope system?

The envelope system is an organizational method for managing your money. You start with budgeting your expenses, allowing you to save money each month. Frequent purchases are organized by placing cash into envelopes specifically dedicated for each expense (e.g. groceries or free spending).

Most people use the envelope system as a way to control spending. You can’t overspend, because there is only so much money in the envelope. The money is visible, which means you can always see how much money is left for groceries.

Debit and credit cards tend to get people in trouble who don’t budget or monitor their spending. It’s hard to know how much money is left for groceries when you swipe your payment card.

Simply stated, the cash envelope system is going to help you save money by placing a visual limit on your spending.

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How do you start a cash envelope system?

Ok, so how do you start the cash envelope system? Starting the envelope system takes some initial effort to get started, but it can be worth it. You can start the envelope system with the following steps:

  1. Start a budget.
  2. Create envelopes for frequent purchases.
  3. Fill the envelopes with cash.
  4. Stick to your budget.

So let’s get started by starting with creating your budget.

1. Starting a budget

Starting a budget is the most time consuming steps to starting the envelope system, but it’s also one of the most important. A half-baked budget is only going to cause problems, like not sticking to it or not preparing for all expenses.

Start with your income. How much money do you bring home every month? You want to know your net income, or the amount of money that actually shows up in your bank account.

Let’s say your family brings in a total of $3,800 each month.

Next, you’re going to need to create a complete list of expenses. Examples of your expenses could include:

  • Investing
  • Rent/Mortgage
  • Debt payments
  • Bills (Water, Cable, Internet, Electricity, Trash, etc.)
  • Household expenses (Repairs, Yard, Toiletries, etc.)
  • Personal expenses (Hair cuts, personal spending, etc.)
  • Transportation (Gas, bus fare, auto repair)
  • Food (Groceries, Restaurants)

Everyone’s situation will be different. Take time to really nail down your list of expenses, making sure everything is captured.

Then, assign each of your expenses a portion of your income. Every cent of your income should be allocated to an expense or savings.

  • Investing – $655
  • Rent/Mortgage – $1,200
  • Debt payments – $300
  • Bills (Utilities ($125), Phone ($40), Cable & Internet ($125)) – $290
  • Household expenses (Repairs ($50), Yard ($50), Toiletries $(40), Others ($160)) – $300
  • Personal expenses (Hair cuts ($40), personal spending ($40)) – $80
  • Transportation (Gas ($250), auto repair ($100), auto replacement ($100)) – $450
  • Food (Groceries ($400), Restaurants ($125)) – $525

Note: The above is for an example only and may not be realistic for budgeting. Check out the recommended budget percentages to help you create your budget.

Remember, budgeting requires constant work and is rarely done right the first time. Take time to review your budget weekly or monthly and make changes as required.

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2. Create envelopes for frequent purchases

Now that your budget is in order, it’s time to create envelopes for your frequent purchases. From your budget, what categories will you be frequently spending money in?

Examples of categories in an envelope system include:

  • Groceries
  • Restaurants
  • Personal spending
  • Toiletries
  • Hair cuts
  • Gas
  • Gifts
  • Clothing

Most of your bills should be on auto pay, so you won’t need an envelope for paying bills. Remember, the goal is to control categories you are most likely to overspend in. For most people, the top overspending categories would be food and personal spending related.

You can purchase fancy cash envelopes specific for the envelope system. However, standard letter envelopes work just fine.

3. Fill the envelopes with cash

Next, you’ll want to determine how frequent you want to fill your envelopes with cash. The most common method is to fill your envelopes once a month or each time you get paid.

Once a month is my personal favorite because it limits the number of trips to your bank. However, I can respect that people may want to add cash to their envelope for each paycheck. So how does that work?

If you’re paid twice a month, each cash deposit would be half of your monthly budget. For example, if you budgeted $400 per month for groceries, then add $200 to your grocery envelope per paycheck. If you’re paid 26 times per year, add $184.61 per paycheck.

What do you do with the leftover money in cash envelopes?

Leftover money at the end of each month means you’re doing a great job on your budget! Simply keep the money in the envelope and add money during your next scheduled deposit.

So if you end February with $25 in groceries, you’ll start March with $425, assuming you deposit $400 per month for groceries.

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4. Stick to your budget

As you can probably tell, the envelope system only works if you stick to your budget. I recommend reviewing your budget at least monthly to see if any changes need to be made.

Sticking to your budget will be one of the hardest challenges you face. It’s extremely easy to overspend and blow your budget. Just $10 per week of overspending adds up to $40 per month or 10% of your $400 grocery budget!

It’s also easy to want to borrow money from other categories when you run out of money. However, doing so will only hurt your ability to save money and pay off your debt.

Does the cash envelope system work?

The cash envelope system has proven to be an effective way for managing your money. Yes, this system will help you pay off your debt and take control over your finances. However, there are some pretty big cons about the envelope system.

Personally, I feel the cash envelope system is a good way to take control of your spending. However, it is far from the best money management system. Therefore, use it for controlling your spending, paying off debt, and then adapt a more advanced money management system.

So what are the cons of the cash envelop system?

  1. Your spare money isn’t invested. Cash envelopes leave a lot of spare money on the table. If you make $3,800 and have good spending habits, chances are you aren’t actually spending all $3,800 each month. This left over money is now sitting in envelopes, not taking advantage of compounding interest.
  2. You are now carrying around a lot of money. Do you really want to walk around with over $500 on your person? You could be the target of theft if someone sees your cash envelope at the grocery store. What if you accidentally lost your envelope, full of cash?
  3. Constantly need to carry cash. You can’t just swing by the grocery store on your way home if the envelopes are at home. Couples will have a difficult time if one person usually does the shopping, but the second person has time to stop on their way home.
  4. You need self control. Managing money takes self control in general, but so does the envelope system. What happens when you’ve spent your grocery money and have a week left to go? Are you going to stick to your budget or is it going to be too tempting to steal from a lesser used category.
  5. Slow checkout. If you ever thought someone writing a check was slow, just wait until you start paying in cash.
  6. Purchasing multiple categories. What happens when you go to the grocery store and you’re purchasing groceries, toiletries, and a personal expense. You create three different transactions.
  7. Keep track of food costs when shopping. You’ve got $100 left for groceries, so now you need to be extra cautious not to exceed your grocery budget. While shopping, you need to keep track of the cost of everything in your cart. That includes produce which is often pay by the pound.
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Summary:  How to start the cash envelope system

As you can see, there is a lot to consider when starting the cash envelope system. If you need to gain control of your money and pay off debt, the envelope system might be right for you.

Cash envelopes allow you to save money by controlling your spending. Unlike debit or credit cards, the envelope system makes your money visible, which makes it harder to overspend.

You can start the envelope system by following these steps:

  1. Start a budget.
  2. Create envelopes for frequent purchases.
  3. Fill the envelopes with cash.
  4. Stick to your budget.

Creating and sticking to your budget will be the toughest challenges you face. It is extremely easy to overspend and be tempted to borrow money from other categories. Do your best to stick with your budget and adjust as needed.

While the cash envelope system can help you gain control of your money, it’s not the perfect system. You’ll find several issues when using the cash envelope system that you’ll need to overcome. I highly recommend looking into more advanced money management systems once your debt and spending is under control.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.