If you struggle with overspending, making the switch to a cash-only budget is the fastest way to tackle the problem.
Switching to cash spending forces you to live within your means.
It also forces you to be more deliberate in how you choose to spend your money.
Using the cash envelope method will help you take control of your money by giving you more awareness and accountability in your spending decisions.
What is the Cash Envelope System
The cash envelope system is a budgeting method that uses envelopes to represent your spending categories. You determine your spending goals per budget category and fill the respective envelopes with enough cash to reach those goals.
This envelope budgeting is perfect for anyone who has difficulty sticking to a budget or a tendency to overspend when using debit or credit cards.
Why You Should Consider Using the Cash Envelope Method
If you’ve been looking for an easy way to control your spending, switching to cash may be your answer.
By moving to cash-only you’ll no longer have the ability to spend beyond your means.
You’ll be forced to make more deliberate decisions and curb any mindless spending.
Even if you’ve largely got your finances under control, all of us have problematic areas of our budget where we’ve overspent before.
Taking on a cash diet and making the switch for just those problem categories can be a great way to reset your budget or even ease your way into going 100% cash-only in the future.
How to Get Started With Cash Envelopes
Cash envelope budgeting is probably the easiest budgeting method there is.
While you can totally get fancy with your envelope designs and expense tracking, all you really need to get started are some plain envelopes and a pen.
Step 1: Figure out your categories
The first step to creating your envelopes is to determine your categories. Each spending category of your budget will be a separate envelope.
Make a list of all the categories you think you may need, but be aware that the more categories you have, the more envelopes you’ll have to keep track of.
Step 2: Determine your budget amounts
Once you’ve got your categories determined, it’s time to figure out how much you want to budget for each one.
I’m a huge fan of paycheck budgeting versus a monthly budget. When you budget per paycheck, you focus on only budgeting the money you need until you get paid again instead of worrying about the entire month.
Take a look at your upcoming expenses, both fixed expenses and variable expenses, to determine how much you need.
Step 3: Create your cash envelopes
It doesn’t matter what envelopes you’re using to get started (grab some free printable cash envelope templates here), but at a minimum, each one needs to be labeled with the appropriate category.
You’ll want to make sure you’re only spending from the envelope that matches the expense category so you avoid accidentally (or intentionally) spending from other envelopes.
Moving money between envelopes will confuse an otherwise
Avoid dipping into another spending category if you want to maintain control of your money and awareness of your spending.
Step 4: Fill your envelopes
Next, you need to fill your envelopes.
While it’s probably easiest to just swing by an ATM, going to an actual teller so you can request a variety of bill denominations may be a better option depending on your budgeted amounts.
Having a good mix of $5s, $10s, and $20s will help you be more prepared for all sorts of expenses and keep you from having to move money around between envelopes.
Step 5: Spend from your envelopes
Finally, start spending from your envelopes.
Make sure you’ve cut up or hidden your credit cards to avoid the temptation and ensure you’re only spending from your newly created budget envelopes.
Tracking Your Spending With Cash Envelopes
As you spend from your cash envelopes, it’s a good idea to track that spending.
Many cash envelope templates incorporate some sort of spending tracker on them, but you could also just keep a slip of paper inside the envelope to write down your spending and update your balance.
It’s important to track your spending if you want to have control over it.
Some of your expenses may be future ones you’ve budgeted for, but if you’re not updating your envelope balance you may make the mistake of spending that money on something else.
Pros and Cons of Using Cash Envelopes
As with any budget, the cash envelope system has its pros and cons.
Advantages of Using the Cash Envelope Method
- Makes you more aware of your spending habit
- Helps you save money faster
- Keeps you from overspending
- You don’t have to worry about overdraft fees
- You’re more deliberate in your purchasing decisions
- Requires pre-planning your purchases
Disadvantages to the Cash Envelope System
- Carrying a lot of cash around can make you feel uncomfortable
- Keeping a record of your spending requires more effort
- It can be hard to coordinate with family
- You have to physically go to the bank or ATM for cash withdrawal
- Categories can overlap making it difficult to determine which envelope to use (is dining out a food expense or an entertainment one?)
- You won’t get any credit card rewards like mileage points or cash back
- Reduced spontaneity
- Potential for loss
Sample Cash Envelope Categories
Using physical envelopes can present a problem if you start creating too many categories. You may end up with a huge stack of envelopes to manage.
While it’s entirely personal preference how many envelopes/categories you have, here are some cash envelope categories I’d recommend to get you started.
- Dining out
- Household items
- Fun Money
In addition to typical expense categories, you may want to create some sinking fund envelopes for unexpected or infrequent costs.
Some ideas for sinking fund categories:
- Car maintenance
- Gifts (non-Christmas, like birthday and anniversary)
- Medical (think co-pays and deductibles)
- Back to School
Printable Cash Envelopes
To help you get started I’ve designed some free printable cash envelopes you can download and use.
How to Organize Your Cash Envelopes
How you organize your envelopes will depend on your own preferences.
There are wallets and Filofaxes designed specifically to accommodate cash envelopes. These are probably most helpful for any envelopes you carry consistently and want access to 24/7.
For the envelopes you keep at home, you can use a storage box or a wallet-sized expanding folder.
Start budgeting with the cash envelope system without all the bulk using this slim designed cash envelope wallet.
This cash box with a key lock is the perfect way to safely store your cash envelopes when you're not using them.
Apps that Simulate the Cash Envelope Method
If you’re sold on using envelopes to budget, but prefer to apply it in a digital way, there are some apps that aim to do just that.
While you won’t get the same benefits entirely, one of these budgeting apps will help you bridge the gap.
Tips for Switching to Cash
Cash envelope budgeting is pretty straight forward, but here are some tips to help you get started.
- Start small. Only pick a couple of spending categories you struggle with to start so you don’t get overwhelmed
- Only carry the cash you need.
- Adjust when necessary. You don’t have to be held captive to your estimates or wait until payday to make changes. If you grossly underestimated your grocery spending, reassess, reprioritize, and move some stuff around.
- Keep some “forgot my envelope” money. It’s a good idea to “hide” some extra cash in your purse or wallet or even your car. Think of it as a tiny emergency cash stash if something unexpected pops up.
Frequently Asked Questions
What If I Pay Some of My Expenses Online?
Not every expense has to be paid in cash to benefit from the cash envelope system.
You can still automate your bill pay and buy subscription services using your debit card or a pre-paid credit card. Just be sure you’re keeping track of any withdrawals so you know your checking account balance and don’t risk overdraft fees.
What If I Run Out of Money in My Cash Envelope?
The harsh answer is, you wait until you’re paid again and can replenish it.
For most categories, this scarcity will actually be beneficial and temporary.
Not only will you have a better understanding of your spending habits, but you’ll learn to get creative when you need to.
If your dining out envelope is empty and your grocery envelope is low, try a pantry/freezer challenge to make meals using what you have.
The exception to this would be if you vastly underestimated what you need. If you’ve run out of your grocery money with no food left in the house and the options are to steal from another envelope or starve, I’d hope you’d choose to eat.
That said, instead of randomly pulling from another envelope I’d suggest you reassess ALL of your categories and make sure you’re still budgeting according to your priorities.
What About Emergencies?
First, I’d ask you what constitutes an emergency? This is something you may want to consider before you even start your cash envelope budgeting journey.
Running out of money in the entertainment envelope right before the new Marvel movie comes out isn’t an emergency to me, but I’d probably have an argument on my hands with my hubby.
Setting rules and boundaries in advance will help you make a good choice when faced with a tough issue.
Note: I do NOT recommend keeping your emergency fund in a cash envelope. Any large savings goals like that should be in an interest-bearing savings account that you have ready access to. Safe and sound, but available if needed.
What If I Have Money Left at the End of the Pay Period?
First, yay you!
If you’ve got money left over there are a couple of things you can do.
You can roll it over and keep it in the envelope for the next period. Just top-off the envelope with whatever extra is needed.
Alternatively, you can pull that left-over money out and use it toward other financial goals like paying off your credit card debt or building an emergency fund.
Do I Need to Track My Purchases When I Spend With Cash?
If you want to succeed, you need to track your purchases, regardless of the payment type you choose.
Part of having control of your money means knowing where you spend it.
Seeing an empty Dining Out envelope won’t help you understand you have a Taco Bell problem unless you’ve been tracking it to see you’ve eaten there 6 of the last 7 days.
Is It Safe to Carry Lots of Cash Around All the Time?
Probably not, which is why I suggest you only carry the amount you’ll need.
If you find yourself nervous about the amount of cash you’re carrying, you might want to try spreading your cash out between different pockets or compartments of your bag.
You could also get a travel money belt to keep your cash hidden on you.
What If My Spouse Does Some of the Shopping?
Making the cash envelope system work with a family can be a bit of a challenge, but it’s totally possible.
You’ll just need to make sure you’re communicating with each other and planning in advance.
If the management of your envelopes becomes problematic, you can try splitting that category up into 2 envelopes, one for you and one for your spouse.
For example, if you and your husband split the grocery shopping, instead of trying to remember who needs the groceries envelope, divide your grocery budget into 2 different envelopes to reflect the amount of shopping you each do.
What If I Prefer Online Shopping and Don’t Carry Cash?
One of the reasons a cash-only budget works is because it largely curbs impulse buys.
Take a look at your online shopping and see if those are purchases that actually line up with your priorities.
Assuming they are and you simply don’t like to carry cash, you can still try envelope budgeting using your debit card.
In place of actual envelopes, try an app like Qube Money to organize your categories.
If you’ve been struggling to take control of your spending, I highly encourage you to give the cash envelope method a try.
The awareness you’ll gain about how you’re spending your money will help you become both more disciplined and more intentional.
Start with a cash diet in just one or two problem areas and see how it affects your spending.
Let your results guide you in deciding what categories to tackle next.
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