How to Start and Use the Cash Envelope System

If you’re struggling with money or you’re wanting to manage your finances better, then learning to control spending is one of the toughest challenges you’re going to face. However, if you’re serious about getting your financial life in order, then learning how to use the cash envelope system will save you thousands of dollars over the course of the next few years and it will play an integral role in helping you manage money better.

What is the Cash Envelope System?

The cash envelope system is a money management tool that will:

  1. Allow you to stick to your budget.
  2. Give you the freedom to spend money without the feeling of guilt or regret.
  3. Give you the power to say “no!” to your friends and family.

Basically, instead of making purchases with a credit card, debit card, OR writing a check, you instead only use cash for those purchases.

The cash envelope system is only to be used for discretionary spending items/categories. “Discretionary” simple means that you have a choice in the amount of money that gets spent on that particular item or category. So, for instance, here are all of the different categories (and envelopes) that we have in our cash envelope system:

  • Groceries
  • Eating out and entertainment
  • Hygiene – tooth paste, toilet paper, shampoo, floss, deodorant, etc.
  • Hair cuts
  • Clothes
  • Dog care – food, toys, pet visits, heartguard, flea medicine
  • Housing products – cleaning supplies, paper towels, etc.
  • Blow money – an equal amount of spending money that my wife and I get for the month to use on whatever we want (that’s not covered in the other categories).
  • Dry cleaning
  • House and kitchen fun money
  • Gas (for the car)

Something that’s important to understand is that the cash envelope system must be modified to meet your life and budget. For instance, many of my clients buy their groceries, hygiene, and housing products at the same store. If that’s the case for you then you may want to consider having all of those categories as part of one envelope. For my household, we typically shop at different places for each of those things so it makes more sense for us to split them up.

Also, some of you may have to add an envelope or two. For example, if you have children you may want to include an “allowance” or “commission” envelope. If you have teenage kids then you can have an envelope for the money you’re going to give them each month for their spending or gas.

How to Start the Envelope System

1. Get on a budget

Without a budget it’s impossible to know how much you can allocate to each cash envelope. If you’ve never budgeted then start with the principles of budgeting and walk through that budgeting series.

2. Determine which categories need to become cash envelopes

See my list above as those are the most common categories (less “dry cleaning”) in the cash envelope system.

3. Go buy some envelopes

This isn’t called the “cash envelope system” for no reason. Each category has a separate envelope with it’s own money. Write the name of the category on the front of the envelope and use use that cash envelope only for its designated category.

4. Determine how much cash each envelope should get

It’s important to understand that it takes 2-3 months to really get this part right because there is no “perfect” amount for every family out there. So, with that in mind, you MUST test it out and see if the amount you allocated works! If you’ve never budgeted before, then use these average budget numbers to get started and adjust from there. When determining the amount each cash envelope should get, think in terms of monthly amounts.

For instance, if you’re a family of 5 (husband/wife with 3 kids under 10) then consider starting your grocery envelope with $500/month. At the end of the month, if you have money left in your cash envelope system then try starting with $450 next month. However, if you discovered that $500 didn’t work, then increase it to $550 next month. Do this for each cash envelope category.

Lastly, if you go to the grocery store once/week and budgeted $500 for the month, that doesn’t mean you have to take all $500 with you. Simply take $150 for that week and leave the rest in the envelope system at home.

5. Determine when to withdrawal the cash each month

Everybody’s budget will vary, but if you make a decent amount of money (and have a relative low amount of cash expenses), then you might be able to take out all of your cash and fund your cash envelope system with the first paycheck of each month. If you get paid every-other week, then consider splitting up the monthly total and taking it in two equal amounts on your pay dates. If you get paid weekly, then split the monthly cash envelope total by 4 and withdrawal 1/4 of the cash each time you get paid.

6. Make it work and stick to it

The cash envelope system isn’t some perfect, flawless system that will work for every family out there. Some people prefer to avoid using cash completely and opt to maximize their budget by taking advantage of credit card rewards. With that said, mold the envelope system to fit you and your family. If you’re hesitant about using cash envelopes for all of your spending categories, then start with one item such as groceries. Test it out for a month or two and see if you like it. If you do, then slowly transition other categories to the envelope system.

Finally, if you’re going to use the cash envelope system, then stick to it! The sole purpose of the envelope system is to ensure you don’t overspend on a particular category (as your cash serves as your monthly limit). So, it’s pointless if you’re going to blow through your cash and use your credit card or debit card once you’re out of money.

Conclusion and Why It’ll Help Control Spending

Most people throughout the world fail to pay attention to how much they spend each day, week, and month. We’ve become accustomed to swiping our debit or credit cards and it doesn’t dawn on us how much we’ve spent until we look at our bank account and see that we don’t have any money left!

Solution: the cash envelope system. You’ve taken the time to establish a budget so that you can determine how much you CAN allocate every month to each envelope category. Once you’re on the cash system then you’re making it a habit to withdraw the cash at the beginning of each month, where you begin spending it as needed. You spend the cash freely, but you remain cognizant that it’s supposed to last you the entire month! Once the money is gone, you’re out of cash for that category until the next month begins at which point you’re allowed to go back to the bank to get more.

The cash envelope system has worked wonders for the WSL house. We first got on the system nearly 5 years ago and it has forced me to be disciplined and to learn to say “no” to my friends and family (and myself) when we run out of money. Learning to control spending is an integral step to paying down debt, building savings, and getting your financial life in order, and the cash envelope system will help you get there!

Have you tried the cash envelope system? Did it work for you?

About the Author

By , on Jun 13, 2013
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{28 Comments}

  1. Mary Slagel says:

    This is a great idea if I weren’t terrified of cash. I tend to spend it quicker than I would if I were using my debit card but I understand how this could be useful to others because you actually get to visualize the money you are spending.

  2. This cash envelope system really helped our family save a lot back in the day but now my mother is searching for other ways. I think as time goes by, it really bores her to do this.

  3. DebtGirl says:

    Hi there, I found your site from Miss T. Great post. I haven’t started this system but I have before, and it does work. However, tomorrow, when I go to the grocery store, I am only taking enough cash for what I need and leaving home the wallet so I don’t just “shop”. Thanks for great post!

  4. Catherine says:

    We sort of do this…I say sort of because getting to our bank is a bit of a pain in the butt so we usually end up using our debit card but in the same way. We have our pays and bills deposited and w/d from the same account but transfer our weekly allowance to a separate account that we can debit from if we can’t get to a bank to w/d our cash. If we use our debit card rather than having cash in hand we still make sure we don’t go over budget with our spending.

  5. Jose Nieto says:

    Andy, I enjoyed your post. I have to admit that envelope budgeting is, in my opinion, one of the best budgeting techniques available. I take it a bit further though and create electronic envelopes in my checking software then allocate money for mortgage payments, Insurance, Utilities and other large expenses that can be averaged annually. That way I know exactly how much to contribute to each “envelope” on a monthly basis. I’ll be posting several topics on this on my own blog.

  6. Alex says:

    Excellent post on the cash envelope system!

    My only problem with cash envelopes is that you can’t get reward points on them, but since credit cards often enable bad spending decisions that might be a fair trade-off. I’m a greed optimist who wants the best of both worlds *grin*

  7. It would be a nightmare if we had to use jars or envelopes in our house but for some they love it! I recommend it to many fans who are looking to use cash instead of credit cards or debit and it works. I actually was pumping petrol the other day and saw a young lady walk in to pay for her petrol with an envelope in her hand. Nosey bloke I am I lean over and sure enough it says GAS on the outside. She pulled out some crisp bills and I asked her if that was part of her budgeting and she said yes. They fill it with money once a month and that is what they use. Interesting to see someone actually using the system but I still thought for us it wouldn’t work. We love our credit cards too much and those lovely rewards. Great post mate. Happy New Year!

  8. Thad P says:

    Great post Andy. There are some people for whom the tangible aspect of the cash actually being something they can touch makes the envelope system work. Give them a budget with a checking account or debit card and it doesn’t work, but actually being aware of the real cash “clicks” and budgeting works.

  9. I never really got into the envelope system because so few of my expenses can be paid with cash. Adding it up, 80% of the budget is things that we can’t use cash for, like the mortgage and the car insurance.

    I also don’t include gas in my budget. The amount we spend each month depends mostly on two variables that we have little or no control over: the price of gasoline and how much driving. When I was working, some days I could ride my bike and not drive, some days, I drove 8 miles, and some days, I had to drive 50.

  10. You know I’m all about this. We did this for our first year of marriage, and honestly stuck to our budget like 99% of the time! It’s a flippin’ sweet way to build great habits, so if/when you switch to rewards credit cards, your spending habits don’t change :)

  11. Love the envelope system. The boy and I have made so much progress on goals since implementing it a few months ago. A huge benefit of the envelope system is accessibility to immediate cash in the event of a disaster as well. (of course this may not always be practical, such as in Pauline’s situation.)

  12. This is a great way for people who struggle to stay within budget to live, but its not to me. I love earning travel rewards from my credit cards.

  13. Mackenzie says:

    I’ve never used a cash envelope system. But I’m seriously thinking about it for next year, to get a tighter reign on our finances.

  14. Great post!

    I think that a cash envelope system is a great start for people who are just beginning to get a handle on their finances.

  15. Debt Roundup says:

    I have thought about using this system, but I am just not sure of it yet. I have recommended it to some friends who have a big problem with spending with plastic. Hopefully it will work for them.

    • Andy says:

      It takes a few months to get adjusted to, but having been on it for so long I’m not sure I could ever go back to swiping a debit or credit card for everything.

  16. We use the Envelope system for three different categories and highly recommend it. When we paid off $52,000 in debt over 18 months, this was a huge reason we were able to do so.

  17. My wife and I have been using the envelope system for 4 years. We can’t imagine spending our money any other way. The power of cash is a useful tool in money management.

    • Andy says:

      Thank you for commenting, Robert!!

      I couldn’t agree with you more. It’s a great way to help limit and control you spending. By knowing precisely how much you’re going to spend each month on your living expenses (cash items), it then gives you the freedom and comfort knowing that the rest of your budget will work.

  18. Pauline says:

    I have never used envelopes but used to have a cash budget for everything for the week. Here in Guatemala I couldn’t sleep at night with so much cash inside the house!

    • Andy says:

      I’ve had a lot of people say that even here in the US. I simply suggest putting the money in safe…furthermore, (at least for people here) it’s not any more likely that somebody will break into your house because now all of sudden you have cash in there. Reason being: nobody knows you have cash in there!!

  19. Katie says:

    Yes, this was the first year I tried the envelope system. I ROCKED this system, while I understand it’s not for everyone, it’s definitely for me:-)

    • Andy says:

      That’s great to hear, Katie! And thank you for your first comment by the way! :)

      We’ve been on the cash envelope system for 6 years now and I don’t think we’ll ever change. The ONLY thing we’ve adjusted this year was using our credit card for gas (as that used to be a cash item as well).

  20. Great post Andy. About the only thing I don’t like about the envelope system is that you don’t get to earn interest on your money, although with the low interest rates in the US it barely makes any difference.

    • Andy says:

      Even if the interest rate was higher, the cash envelope system will SAVE you far more than interest would earn you if the money was sitting in a bank account – especially if you’re undisciplined managing money.

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