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I like to think there are a lot of people in the world kind of like me. When I first started looking for ways to manage my money better I was willing to try anything. Whatever I was doing wasn’t working so it was time for something new. The cash envelope system resonated with me because it helped with two things: 1) My propensity to use my credit cards and 2) My love for pretty stationery.
Sure, you can get started with free envelopes. In fact, you should. Don’t let “pretty envelopes” be a reason to stop you from starting. Make them the reward not the obstacle. It’s the pretty envelopes that keep me motivated. I love looking at them and I love to reward myself with new ones!
What are Cash Envelopes?
Cash envelopes are paper or cloth envelopes used to hold cash and change for people using the cash envelope budget method. They can be plain or decorated, DIY or purchased.
What is the Cash Envelope System?
The cash envelope system is a way of budgeting where you only use cash for your day to day spending. In order to stay on budget, this cash is separated into individual envelopes by category. When an envelope is empty, you have reached your budgeted limit in that category and must wait until the envelope is refilled.
The cash envelope method of budgeting was made popular by Dave Ramsey. This method allows you to be more deliberate about where you spend your money. Paying by cash allows you to see how quickly small transactions add up over the course of a week or month. I wrote a blog post that goes into much more detail about how you can get started with the cash envelope method of saving money.
How Do You Organize Cash Envelopes?
Step 1 -- Establish A Budget
First, you need to come up with a budget. It’s imperative to know the amount of money that you receive and the total amount of bills that you pay every month.
If you haven’t done a budget before, my post on getting started with your first budget is a good resource. I even cover how to analyze your bank statements for a jump start.
Step 2- Categorize Your Spending
Once you have made your budget, you need to categorize your spending. There are some categories that cash just may not make sense. Usually, this is things like rent/mortgage, fixed utilities and fixed debt payments (credit cards, student loans, etc).
The remaining categories are variable expenses and anything you can pay cash for (whether or not you usually do). This is things like dining out, groceries, gas, nails, clothing, mechanic, etc.
Step 3- Make or Buy Your Envelopes
Now that you know your categories, you will need your envelopes. Label each one with the corresponding category. Remember that your partner will need envelopes too. If you aren’t both on board with the envelope method, it isn’t going to work.
That means you may need two sets of envelopes. The guys may not want cute stripy envelopes so color coded paperclips may work best for them.
You could start out with 20 different categories of envelopes. If you do, that’s OK. You shouldn’t need to carry that many with you every day. Only carry the envelopes each day that you are likely to spend in. Start out with a larger number and, as you use the system, you’ll be able to predict which envelopes you will need which days.
Here is the video instructions for making the envelopes shown. The free printable is available in my resource library!
Step 4 -- Fund Your Envelopes
This is the fun part! Go to the bank and withdraw the cash you will need to stuff your cash envelopes. This will be a mixture of denominations so use our cash envelope withdrawal tracker to figure out how many of each you will need.
Once you have your envelopes, stuff them! This is the fun part for most people. It is even a popular video on YouTube.
Step 5 -- Use Cash
The key here is you need to STOP paying with a credit card for any item that isn’t in one of your fixed expense categories. Let’s say you go to Walmart and they have a killer deal on a TV. Just because you don’t have a cash envelope named Electronics or New TV doesn’t mean you can swipe your card for that item. The goal is to be intentional with your spending.
Step 6 -- Repeat When Needed
You will need to repeat these steps in each budget cycle. If you are using the paycheck method to budget, you’ll fund your envelopes every payday whether that is weekly, bimonthly, monthly, etc.
If you have at least a one month emergency fund, you could fund your envelopes once a month. There is no right answer, use what works for you.
What I Do: I have completed Dave Ramsey’s Baby Step 3 and could fund my envelopes once per month even though I get paid bi-monthly but that doesn’t work for me. I stuff my cash envelopes every weekend. Grocery day for me is usually Saturday or Sunday so I go to the bank, withdraw my cash and stuff envelopes when I get home (after I grocery shop…but check out this technique I developed so I don’t overspend). Thankfully my bank has an ATM that gives out different denominations so I am not limited to bank hours.
Some Tips To Help You Stay On Budget
- Once the money you’ve set aside in each category runs out, do not continue spending.
- To remain in your budget, make realistic spending goals.
- Figure out what works best for you and adjust as much as you can. At least initially, you may find you need less money (or more) for each category than you thought…adjust it!
- At least once a month “check in” on your cash envelopes and see if there is any extra that can be moved to savings or thrown at debt.
What Categories Are Used for the Cash Envelope System?
Cash envelope categories are going to vary from household to household. For example, I don’t need a haircut envelope, period. I cut my own hair and my daughter gets hers done for free by her dad’s girlfriend.
On the other hand, I have a “dog” envelope for my dog. If you don’t have a dog, you wouldn’t need that envelope.
Cash Envelope Categories
Here is a list of some of the most common cash envelope categories:
- Dining Out
- Hair / Beauty
- Date Night
- Auto (maintenance, repairs, etc)
These categories will get most of you started but feel free to create additional ones that fit your needs. I, for example, need a tutoring category for my daughter during the school year. Maybe you need a “Back to School” envelope that you will fund all summer to help save for back to school.
Does the Cash Envelope System Work?
The cash envelope system is great because it controls a few important aspects of human psychology. The reason why people don’t save or overspend every month is that putting away money each month is hard.
The cash envelope system allows you to allocate the amount of money that you need to spend on each category. If you budget for $20 per week for Starbucks, you should never feel guilty using the cash out of that envelope for that purpose. But, once it is gone, it is gone. If you can curb overspending, the cash envelope system has done its job!
A little about me: I’m a single, working mom who knows what it is like to be deep in debt. There was a time in my life where I was even caught in the vicious payday loan cycle just to stay afloat. Now, I’m debt free and saving for a home. I love educating others and want to share the ideas and strategies that allowed me to pay off debt and continue to live within my means.
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