Cash Envelope System: How Does This Budgeting Method Work?

Todd Kunsman
December 9th, 2020 | 10 min

If you find yourself struggling to budget and save money, there is a technique you might want to try: the cash envelope system.

While there are many new personal finance platforms and apps that can help, sometimes it can be a bit overwhelming.

And don’t get me wrong, I am a fan of various budgeting apps that exist today.

But sometimes it’s better to go back to basics and remove the digital technology out of your life.

If you are interested in a more “physical” version of budgeting, then the cash envelope system might be for you. Below, you’ll learn everything you need to know about this budgeting method.

What is the cash envelope system?

The cash envelope system is a systematic personal budgeting method. It relies on being able to use cash for almost all fixed and variable purchases throughout the month. So if you haven’t got the cash left, you can’t go splurging on luxury buys.

The envelope system tries to control impulse buying and help you live within your means. And it works by having the saver (that’s you!) plan each and every purchase over the next thirty days.

Advantages of the cash envelope system

There are several benefits of using the cash envelope system; not least being that the method can enable you to get into a good budgeting routine with your money.

It turns out that only 32% of US families currently maintain a budget which can be a risky way of living.

Are you the type to wonder where exactly your money goes each month? Using the envelope method means you are tracking your spending (down to the last cent!) and will highlight exactly where you need to cut your spending or budget more for.

Plus, if you’re prone to overspending, the cash envelope system can prevent it altogether. If you don’t have the cash in your hands; you can’t buy — it’s super simple.

Disadvantages of the cash envelope system

Unfortunately, this budgeting method means you will miss out on those all important credit card bonuses, like travel points and rewards. And while they might not have an exact cash value, credit card rewards can be pretty lucrative!

The other negative factor of the cash envelope method is that holding and carrying a lot of cash can make you feel unsafe. Of course, any of us can be vulnerable to theft in a range of situations, but you may feel uncomfortable pulling large amounts from the ATM or using a credit card.

Steps to starting the cash envelope system

Before you begin spending any of your cash; you’ll need to set up your envelope system. Instead of making these steps overly complicated, I broke it down into just four simple steps.

There will be on going management as your finances change over time, but these will get you right on your way to success.

1. Determine How Many Envelopes You Need

The first thing to decide on is how many envelopes you’ll use AKA how many spending categories fit within your budget.

Usually, rent or mortgage payments and bills are all dealt with electronically so they wouldn’t typically be part of this budgeting method.

As an example, you may have an envelope for each of the following:

Groceries Transport Gifts Charity Household Items Pets Children’s Pocket Money Entertainment/ Fun Money Emergency Fund

Ideally, each person will have a different set of envelopes to match their spending outlay. Remember to only include the categories that you actually need, as too many envelopes can become overwhelming (especially as you learn the method).

2. Figure How How Much Goes Into Each Envelope

Next, it’s time to determine how much money goes into each envelope. For help with this; take a look at your most recent bank statements to see roughly what you tend to spend in each category.

Have somewhere to write down exactly how much you’ve decided to contribute each month so that when you go to the shop; the amount will be fresh in your mind.

Maybe for the first few months you could give yourself a small buffer amount in each category. These are variable funds after all, so a buffer could help to prevent running out. Maybe like 5% or 10% extra.

Of course, any leftover cash can go straight into your savings which is exactly how this method helps build up your long term funds.

However, if your finances doesn’t afford that right now that’s okay! When you go to spend money on say groceries, put some non-essential items back to stick with the cash you have from your “Food Envelope.”

3. Use Your Envelope Cash As Needed

Finally, start spending straight from the envelopes! Stay conscious of the fact that there is a finite amount of cash in those envelopes and that when you run out, you can’t just dip into the next one as this will leave your other categories with a shortfall.

The only time you should consider borrowing cash from another envelope is if you have enough money in the envelope you are taking from to get you to the time you can add more cash.

We spend an average of $659 on gifts for friends and family every year and if this isn’t budgeted month to month; it can be easy to take from other envelopes but where possible, this should be avoided.

Plus, the cash in these envelopes need to last the whole month. For example, if you have $100 for groceries it would be unwise to spend $80 within the first week.

It’s likely you might also have a long-term fund, such as a vacation envelope. In this case you might contribute for 6 months before spending the amount in one go — and that’s okay!

4. Always Have A Goal for Your Envelope Budgeting System One of the best things you can do when you start your budgeting is to have a goal for yourself. What is your initial reason for using the cash envelope system? What are you trying to achieve?

Overtime your goal may alter or change, but you should always understand the reasoning you’re doing this. And if anything, it helps you stay more motivated and focused!

For example, your initial goal for this budgeting system is reduce excess spending and save towards a house. One you reach that goal, you might have another one mind, like wanting to save $500 each month.

Additional Tips For Success

While the steps to starting this budgeting method are pretty straight forward, I have some additional tips for success and things to keep in mind.

Do not carry all your envelopes of cash at once. Carrying a lot of cash on you is never the best idea. For example, you could accidentally lose it, be tempted to spend it, nor do you want to set yourself up as a target for robbery.

Start with your most challenging categories. You’ll probably have a few categories for your budget that you need to set cash aside for each month. And you might not be sure where to start. I’d choose the most difficult categories for you to typically manage, as the cash envelope system will greatly help.

Avoid overcomplicating your envelope system. I know there can be lots of categories for your finances, but don’t end up create too many envelopes at once. Focus on the main items, get used to your system and organization, then add more as needed.

Cash envelope system templates

As it turns out, there are hundreds of pre-made templates out there to make the process even easier. So if you are looking to save some time or just aren’t sure where to start, this can be a great option for you.

Here are a few cash envelope templates you can download and use for your personalization:

On Etsy, a number of creators have put together paid downloadable pdf templates in for envelopes. These come in various patterns, colors, and sizes depending on your preferences. Here is an example of a downloadable envelope template.

Vertex has some brilliant cash envelope registry templates. Simply print and slip inside of each envelope with a pen, then each month you can note down your additions and spending. Click here to view the templates.

You’ll also find tons of free printable’s on Pinterest, here’s one. Just beware that you’ll need some strong paper to make these last, as the typically flimsy paper you might find in a regular printer might wear out after multiple uses.

The cashless envelope method

You might be wondering if the envelope system will still work if you do most of your banking and budgeting online. Short answer: yes, you can totally still use the principles of this budgeting system.

How?

There are a number of ways to integrate this method into your digital savings; the easiest being virtual “envelope” software which still segregates your cash by category and removes from each envelope depending on the purchase.

A great choice for this are apps that combine cash envelopes with online spreadsheets and excel to give you full control to track your transactions. What’s more, it is completely customizable to your budget.

Alternatively, some of the new challenger banks offer similar services. Through apps, these banks automatically categorize your payments and allow you to create various pots of money within one account.

How to use the cash envelope system without cash

Decide on your categories. Similar to above, try to limit these to broad categories like “gifts” rather than specific events like “Jack’s Birthday”. This way, you can contribute year-round and build funds slowly in order to feel less of an impact on your monthly income.

Label and deposit into each category on your chosen app of choice. It is wise to do this alongside a spreadsheet, enabling you to track how much you are spending or saving each month. If you repeatedly find yourself with leftover funds, maybe it’s time to decrease the amount into certain pots.

Depending on the app you’re using, you might have to perform instant transfers into your main account before spending, or this may be automated on your behalf. Either way, it works on the same principle that there is a finite amount within each category of your account and that once the money is gone, it’s truly gone.

FAQs

Does the cash envelope system work?

The cash envelope system can work, but only if you follow the principles of the method. This method requires discipline, and so if you don’t apply control; you’ll ultimately fail.

But, lots of people are successful at using this budgeting method; showing their stuffing videos on sites like youtube. 56% of us fear running out of money before retirement, and this method is one way to prevent that worry.

What if I run out of money in my cash envelope?

By the end of the month, you’ll be expected to have run out of money. But if this is the case before the end of the month, there are two options.

If the purchase is non-essential, you’ll have to survive without it until you refill your cash envelope next month.

If the purchase is essential, you may have to dip into your emergency fund to cover until you can replace the money with your next paycheck.

But don’t make a habit of this; it’s an emergency fund for a reason and you should save it for real emergencies only.

What if I have money left at the end of the month?

Brilliant! It means that you’ve spent less than you’ve budgeted for and you have some extra money for future use. There are a number of ways to use that cash, including investing it or putting it into savings.

Alternatively; you could add this cash straight into your emergency fund if it’s something that you’re still building, or make an extra payment towards any debt you’re paying off.

Next time you’re envelope stuffing, think about adding slightly less to the envelopes that have previously held leftovers so that your budget is more accurate.

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