How to Use The Cash Envelope System


If you’re having trouble getting a hold of your spending, you will likely benefit from learning about and using the cash envelope system.

The cash envelope system is a great way to manage 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 my wife and me pay off $52,000 in debt in just 18 months.

Is the Cash Envelope System Effective?

One of the reasons why 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.

Like any new habit, you might feel uncertain at first and want to give up. Keep pressing on! You will quickly develop a new routine, and the cash envelope system will seem like second nature in no time.

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 (expenses that fluctuate every month).

Common Cash Envelope Categories:

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

Since these types of expenses tend to vary 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 changes in your variable spending categories.

Use Personal Capital to quickly analyze your credit card and bank account spending activity for free!

Make Envelopes Labeled with Each Spending Category

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

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 simply 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. Next, go to the bank and make a cash withdrawal for the total amount. 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. 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 the budget you have set for a given category isn’t realistic, discuss it with your spouse. Consider adjusting the amount for 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, think about finding an accountability partner. Find someone who is going to help you stay on track and who you trust. Then meet with them at least once a month to go over your finances. 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 the motivation to stay within our budget.

Tips to Stay Motivated

For anything in life to be successful, you need the motivation to reach your goal. Even if it doesn’t seem like you can see the light at the end of the tunnel, still set periodic milestones for yourself. Celebrate your progress, so you don’t grow complacent or give up. After all, life isn’t all work and no play. You need to find balance with your finances and every aspect of life, for that matter.

Here are some ideas to keep you financially motivated while enjoying the fruits of your labor:

  • Have a “date night” outside the home every three months instead of every month
  • Rent a movie
  • Take a day trip every six months
  • Host a party for family and friends (just because you can!)
  • Start a new hobby

The envelope system helps you practice delayed gratification instead of instant gratification. Adjusting your spending mindset doesn’t mean you need to forsake your fun habits entirely. You just have to enjoy them in moderation. By hitting your spending goals every few months, you can go out and enjoy a small celebration.

For example, instead of spending $100 a month on a single date night with your spouse, you might only do an expensive date night once a quarter. For the other months, stay in and have fun or do something for free in town instead. You will soon see that you can have fun without spending money.

Common Questions About the System

Understandably, it can be nerve-wracking to do things differently. 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 fears that people have about the system, and what we’ve learned regarding the answers.

Do I Need an Envelope For Every Spending Category?

For the best results, you need to create an envelope for every spending category that you currently pay for with cash, credit or debit card. As a brief refresher, the most common cash envelope categories are:

  • Groceries
  • Dining out
  • Clothing
  • Entertainment
  • Gas
  • Miscellaneous
  • Kids
  • Online Spending

For online spending, transfer the money from your online spending envelope to your payment account. If you shop online with a credit card, Debitize will automatically withdraw the cash from your bank account to pay off the credit card balance.

Every person has a different financial situation. So, you can add additional envelopes that I did not mention above. Some of these categories might include charity, auto maintenance, or large savings goals like a family vacation or a replacement vehicle.

Read our tips to help you determine your budget percentages.

You might make envelopes for the following categories:

  • Housing
  • Utilities
  • Insurance
  • Taxes (Unless you’re self-employed and don’t pay in during the calendar year)

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

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. No rule 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.

Having your money in one place is the easiest way to track your spending. You only need to dedicate a few minutes each month to make the envelope system work.

How Do I Track My Spending With the Cash Envelope System?

The envelope system is a process of trial and error at first until you can accurately determine how much you spend each month on each spending category. Even if you don’t run out of cash mid-month, it’s still a good idea to track your spending. Tracking your spending can help you spend less money each month.

You should try one of the following methods to track your spending:

  • Write each purchase on the envelope
  • Log every transaction by hand in a money journal
  • Create a Microsoft Excel or Google Docs spreadsheet
  • Use a budgeting app

Use the option that’s the easiest for you to record and categorize each transaction. It’s critical to know how you spend every dollar to optimize your spending.

There are dozens of ways to save money on your most common expenses!

Where Will I Get That Much Cash?

Simply take the money out of your current paycheck as you normally would 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 your or your family’s needs and will help keep you on track for meeting your financial goals.

Can I Use the Cash Envelope System Without Cash?

More people are banking online these days for convenience, but that doesn’t mean you can’t use the cash envelope system. Yes, this system is ideal if your employer gives you a paper check that you need to deposit at your local bank. But, you still have a couple of different options if you bank online.

When you bank online exclusively, you should look for a bank with the following features:

  • Sub-Accounts (You can divide each deposit into different “digital envelopes”)
  • Free ATM Withdrawals
  • Bill Pay

Some banks let you cash checks online which is super convenient. But if your employer or online side hustle only lets you enroll in direct deposit, you can still use the cash envelope system in a digital world! 

Creating sub-accounts within your bank account is the best way to create digital envelopes. With every deposit, you divide your paycheck into the appropriate categories. You also have the flexibility to pay your bills online and make cash withdrawals for your in-person purchases. Just make sure you log your in-person transactions, so you don’t accidentally overspend.

If your online bank doesn’t offer sub-accounts, you can also use Mvelopes to create digital envelopes. You can link your various online accounts and create unlimited envelopes. Mvelopes also automatically imports your transactions and monitors your account balance, so you know where you stand financially at any time.

Can I Use This System If I Earn a Variable Income?

Budgeting on a variable income can be frustrating. But, using the cash envelope system is actually an excellent way to live within your means. Even though you might not know exactly how much you’ll bring home each month, you have a good idea of how much you’ll spend.

Cash envelopes help ensure you don’t overspend in any single category. The best way to determine how much you can spend each month is comparing your average monthly earnings for the last six to twelve months.

If possible, try to keep your spending limit below your lowest monthly earning amount. This way, you’ll have a built-in financial safety net and will have extra money each month.

You can use this excess money to make extra debt payments or place in your high-yield savings account to make ends meet during the slow months.

Can I Still Earn Cash Rewards with the Envelope System?

Absolutely! A rewards credit card isn’t the only way to get cash back on every purchase. You can earn rewards by scanning grocery receipts every time you visit the grocery store. Some stores -especially gas stations- offer cash customers a discount because the retailer doesn’t have to pay credit card processing fees.

For your online purchases, you can use a cashback app like Ebates to get up to 40% back at your favorite online stores. Whether you pay with debit, credit, PayPal, or a digital check, Ebates gives you credit for your purchase amount.

You can use your cash rewards for your miscellaneous expenses, so you don’t have to pull from your cash envelopes. Maybe you can use these rewards to pay for your date night too!

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


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