Cash Envelope System


Do you have trouble budgeting? Have you tried going back to spending cash? There is a method you may not have heard of. The Cash Envelope System. This method was popularized by the financial guru Dave Ramsey. You rely on spending physical cash that you have saved away in pre-paid envelopes for everything besides your fixed expenses. 

Today I am going to be discussing how to do this. Let’s get started!

How the System Works

Step 1:Determine How to Allocate Your Money

The first thing is you are going to need to create a budget. You need to figure out how much money you have to spend each month. There are a couple of ways to do this.

The 50/30/20 method is a solid one. You designate 50% of your income for essential. This is your bills and groceries. 30%  of your income is going to your personal self. This is for fun. 20% of your income is going to investments.

The 60% method is the next one. This is where you allocate 60% of your income to expenses you are already committed to.  This includes your necessities and everything that is most important to you. The other 40% is for whatever you want.

The final method is called Zero-Based Budgeting. This where you assign a spending limit to all your budget categories. The object here is to account for every dollar. You will subtract your income from your spending and investments, and should end up with $0 at the end of every month.

Step 2: Label Your Envelopes

Now that you have set up your budget plan, it’s time to grab a stack of envelopes. You will label each one with a spending category. These will vary depending on the categories you have set up in your budget. Color code them to make them distinguishable from each other. Here are some examples of the types of categories:

  • – Groceries
  • – Restaurants/bars
  • – Household supplies
  • – Toiletries
  • – Doctor’s office copays
  • – Medication/vitamins
  • – Pet care
  • – Gas
  • – Ride sharing
  • – Clothing
  • – Hair care
  • – Entertainment
  • – Gifts

Make sure to have one for miscellaneous spending. This will be your emergency fund. In case something comes up, you will have this one to back you up.

Step 3: Distribute the Cash

Now that you have your envelopes filled out, it’s time to fill them. Every time you get paid, go take out the cash from your bank. If you get paid once a month, go ahead and fill your envelopes for the full amount. If you get paid twice a month, you’ll do half. If you get paid weekly, you’ll do a quarter. 

The big key here is once the envelope is empty, you are done. Do not cheat. Also no grabbing money from other envelopes. That would defeat the purpose. You will need to practice restraint. It’s actually easier than you think.

Pro’s of Envelope Spending

You will start thinking twice about your spending. Since you are physically touching the money and seeing where it is going, you will be more mindful. Swiping your card for everything is easier, but there is no feeling of loss. When you break a hundred dollar bill there is that little sting.

One of my favorites is there are no overdraft fees. If you are like me, you probably keep your money in a bank. You may have overextended your budget, and went negative. On top of that, you get hit with that $35 dollar overdraft fee. With the envelopes that is a thing of the past.

Curves your appetite to order online. If you don’t have the money in your bank account, you can’t buy. This will prohibit all impulse buys. You can make and envelope for something specific you have in mind. Once you have it saved, you can put it in your account. Then you can buy it online.

Cons of Envelope Spending

You may miss out on credit card awards. The way to fix this is by using your credit card on your fixed expenses. You are going to pay these anyways so go ahead and use your card to pay for them. Then pay your bill all at once. You get the rewards and still pay your bills.

Some restaurants and stores are going cash-free. There are a couple of solutions to this. Like I stated above. You can deposit the money in your account and then go to these places.  Or you can find places like farmers’ markets and street vendors that do take cash. You may have to do some research but there are solutions. 

You are budgeting for more than one person. Managing this system with joint expenses may be a little more complicated. Get with your other person and work this out. You can split the costs or organize it where you both have your own envelopes for certain things. It just takes some planning. You can split your purchases into individual purchases.

It can be a safety risk. Carrying around large amounts of cash can put you at risk. I mean if someone sees you with large amounts of cash they might get some funny ideas. To remedy this situation, just take the amount you plan to spend. If you are going to the store no reason to take your restaurant and vacation money with you. Only take what you need.

Envelope System Pro-Tips

Track every purchase on the envelope. This will help you be more mindful of your spending. When you see where you spend your money, you will be able to see things you may decide you don’t need. Extra money means more savings.

Get envelopes that are made for this. There are companies that make them just for this. They are made for keeping track of your purchases and color-coded for personal organization.

There you go. It’s a simple system that can save you from yourself. Grab some envelopes and get started today. ‘Til next time.