The Cash Envelope System – Easy Explanation to Help You Stop Overspending

The cash envelope system is one of the many different budgeting systems. You might feel a little overwhelmed when you start figuring out your budgeting journey and researching other budgeting techniques.

Let me give you a clear explanation of how this cash envelope budget system works.

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What is the Cash Envelope Budget System

The cash envelope budget system is a system to organize your finances. Keep a budget using cash instead of cards for spending.

When you get your paycheck, you create a budget for the coming month and stuff paper or plastic envelopes with cash for each budgeting category. So before you can start using this system, you should learn or know how to budget. This system is only a tool to help you stay more on budget. It’s a way of keeping control over spending your money.

The beauty of the cash envelope system is that you can not overspend and go over your pre-determined budget. Or at least not as easily as with debit and credit cards. When there is no more money in your envelopes, you have no more money to spend. Easy peasy.

It’s mostly popular for people who tend to overspend when using debit and credit cards or people who like to see and feel the cash they have earned. It’s also great to visualize the money you have available on any day during the month.

The cash envelope budget system can be combined with other budgeting systems like the 50/30/20 budgeting method or zero-based budgeting for example. With the 50/30/20 budgeting method, you set aside 50% of your take-home pay for your needs, 30% for your wants, and 20% for your savings. The zero-based budgeting method lets you assign a job to each dollar you make so that you end up with zero dollars at the end of each month.

How to Use the Cash Envelope Budget System

How It Works

Create a Budget

First of all, you have to create a monthly or weekly budget. This can be done by taking some time at the beginning of each month, right after you get your paycheck.

Calculate the money available for the next month by calculating your take-home income and start with deducting fixed expenses and bills (like your mortgage or rent, utilities,…). The remaining amount of money can be used for different budgeting categories like groceries, healthcare, personal care, fun spending, etc.

Determine how much money you can spend on each category and try to stay on budget as much as possible. You can always transfer money from one envelope to another and still stay on budget at the end of the month.

To figure out which categories you need money for, it might help you to track your expenses for a few months first. This will also help you decide how much money you need for every category. Make a list with all the possible categories and see if you can combine a few to end up with a clear amount of categories.

Maybe you find it easier to set a weekly budget instead of a monthly one. This way, you will be more likely to still have some money left at the end of your month.

Stuff Your Envelopes

When you have set your budget, you need to have cash available to start the stuffing. When you get your paycheck, you should go get cash from your bank right away.

Start filling your envelopes with the budgeted amount of cash for next week’s or next month’s spending. This is the only money you can spend for the next period of time so think about spending your money wisely.

Carry the envelope you need with you when you go out shopping. If you think that there is way too much money in there to carry with you, keep some of it at home in a safe place and put it back when you are back home.

It’s easiest if you have a wallet where your envelopes fit perfectly.

Leftovers

In the best-case scenario, you have some money left over at the end of each month. This money can go to your savings or to your next month’s budget. I think it’s best to have an envelope with a savings category. This way you will save some money even if there is nothing left at the end of the month because you set it aside at the beginning. Pay yourself first!

Cash Envelope System Tools

Cash Envelope Budget System Wallet

It’s easier when you go shopping to keep your cash in a wallet than in a white paper envelope. To be fair you would look weird carrying a white paper envelope to a store. There are a lot of different options online so let me give you some recommendations.

This wallet seems to have it all. It has cash envelopes for 12 different categories, monthly and yearly budgeting sheets, and even a place to hold your cards as well. It comes in a lot of different colors so you can pick the one you like and start organizing your budget with this wallet right away.

Another cash envelope wallet with 11 different categories and a more minimalistic design I like is this one. It even looks like an envelope! You get to pick a color you love and can use it like a regular wallet.

Cash Envelope Budget System Binder

A binder looks more like a planner than a wallet. I think it’s important to find a binder that is easy to use but you should definitely like the way it looks too in my opinion. I find that there are a lot of ugly binders out there and I personally wouldn’t want to look at those every day.

Here is a binder that looks good and functional to me. If you want more transparent envelopes to put into the binder, make sure to check the size of them so you can order the right size to fit your binder! Very important to get the sizing right!

Another binder that looks like it will do a fine job of organizing your finances is this one.

Paper or Plastic Envelopes

Old school and cheap are paper or plastic envelopes but they work too! You can just buy plastic or paper envelopes, write the category names on them, and start stuffing. It’s less fancy and maybe less fun but it works too if you don’t want to buy a binder or wallet. You can just carry the envelope with you in your purse when you go out.

Pros and Cons of the Cash Envelope Budget System

PROS

• Great way to tackle overspending habits, no more cash in the envelope, no more spending.
• Paying with cash makes you more aware of the amount of money that you are spending. When you pay with your cards, it doesn’t feel like you are spending real money and it feels like there is no limit. When you are using credit cards, there actually is no limit! You don’t even have to have the money before you spend it, which is very dangerous!
• The envelope stuffing at the beginning of each month can be pretty fun. Looking at all the money you made instead of just seeing a number on your bank account.
• It’s easy to put cash from one envelope into another if you need more money for a particular category. It’s a flexible system.
• You can set up as many categories as you want or need. This can be more difficult when you have to make different savings accounts for every category.

CONS

• We live in a digital world where cash becomes more and more unnecessary to carry with you. Most stores like and accept card payments and this is becoming the new standard.
• It can be a hassle having to go to your bank each month to get the cash to stuff your envelopes with.
• It can feel unsafe to carry so much cash with you.

Conclusion

When you are new at budgeting, you are known for overspending money you don’t have or you love holding and looking at your hard-earned cash, this system is for you!

The cash envelope budget system is an easy and flexible budgeting system that can help you to be more successful with your finances, save more money at the end of each month, and help you reach your financial goals.

It makes budgeting come to life because you can actually see and feel the money you are using in your everyday life. This really can be an eye-opener.

Try it out and see if this works for you. It might be the budgeting system you were looking for all along!