How to Use the Cash Envelope System

If you struggle to stick to your budget and are constantly overspending in the same categories, the cash envelope system may be a good solution to keep you on track. This system forces you to track your spending and be more accountable to your budget. Let’s talk about how to use the cash envelope system!

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What is the cash envelope system?

The cash envelope system is a budgeting method that uses cash instead of debit and credit cards for purchases. The cash is separated into different categories according to your budget. Each category has it’s own separate envelope. When you’re out of cash in an envelope you can’t spend any more money.

How do you set up the cash envelope system?

The cash envelope system is pretty simple to set up and make sticking to your budget easier!

Review Your Budget

The first step to the cash envelope system is to review your budget. Make sure each category is realistic, especially if you are constantly going over in the same ones.

To create a budget you basically want to write out all your income, all your expenses, and divide your income between those expenses. Some of them will have set amounts, like bills, and some you will get to choose, like your food budget and personal spending money. If you’re not sure how to go about writing your budget, check out my full blog post here.

Set Your Categories

Once you’ve established a realistic budget, you can decide which categories are going to need envelopes. Most people don’t take out cash for bills or regular recurring payments because it’s easier to set these on auto-pay. The most common categories are things like groceries, eating out, clothing, gas, and personal spending money.

Figure out how much money you need to take out of the bank for each of your categories – look back at your budget for this. Write out what you need for each envelope and what bills you need to make up that amount. It’s a lot easier to fund your cash envelopes if you plan ahead what bills you need to have. Then, total up how many you need of each type of bill so when you go to the bank you know exactly what to ask for. Here’s an example:

You need $25 in food $50 in clothing and $15 in spending money. That means you need a twenty and a five for food, two twenties and a ten for clothing, and a ten and a five for spending money. In total, you’ll need 2 twenty dollar bills, 2 ten dollar bills, and 2 five-dollar bills. Make sense?

You want to write down what bills you need and the total dollar amount and take that to the bank with you when you pull out cash to fund your envelopes.

Set Up Your Envelopes

Now for the fun part… setting up the actual envelopes! I actually think this can be a lot of fun because of how popular the cash envelope system has become. You can get some really cute envelopes that are specifically created to be used for the cash envelope system. They are the right size and are usually laminated so they last longer. Some of them even come with labels, or you can set up a wallet system. There are a ton of different options on Etsy and Amazon… I really like these.

Once you have some envelopes picked out and labeled for your different budget categories, you can actually fund them! Look back at your budget and the cash you pulled out of the bank. All the clothing money goes in the clothing envelopes, the food money goes in the food envelope, and so on. Pretty easy!

Track Your Spending

Tracking your spending is an important part of the cash envelope system. If you don’t keep track of what you’re spending your cash on, you’re going to be shocked one day when you are out of food money and there’s a lot of month left.

A lot of people that use the cash envelope system put small tracking registers in each envelope along with the cash. Whenever they make a purchase at a store, they immediately write down the transaction when they get to their car. This way, you can’t forget you made a purchase and you’ll have a running balance of the cash in each envelope.

What about shopping online?

A common question that comes up with the cash envelope system is the dilemma of how to shop online with cash. There are a couple of different ways you can do this. If you know you are going to be making a purchase online, you can just take less cash out of the bank for the particular category that purchase falls into. That way, you won’t have to take any cashback to the bank.

You can also have a separate envelope labeled something like “back to bank.” Make a purchase online, and then take the cash from the envelope for the related category and put it into the “back to bank” envelope. You then take the money in that envelope back to the bank to cover the online purchase. This can be a little tricky because you have to have a buffer in your bank account or take the cash to the bank right away in order to keep on budget.

It can take a little bit of time to figure out exactly what works for you when it comes to using the cash envelope system and what categories work well to take out cash and which ones don’t. It can take a few months to get used to figuring out what bills you need for your envelopes and remembering you have to go to the bank when you get paid, but once you get used to the system it can make sticking to your budget so much simpler!

Do you use the cash envelope system? Why or why not?

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