What is the cash envelope budget system? It’s a visual budget that allows you to realize what you are spending. If you follow the rules, it helps you stick to your budget. And lower your spending. You’re assigning each dollar a place to go. And only spending what you have assigned.
Like adopting any budget, it’s going to be hard at first. Putting back that extra stuff you don’t need is going to be difficult. And you’ll be tempted to just swipe the card. But if you persevere and are dedicated, having a budget can change your life. It certainly did mine!
Despite what you may have heard, Dave Ramsey did NOT come up with the cash envelope budget. It’s been around for decades. Despite how long it’s been around, there are still a lot of questions about the system. How do you implement it? How to do you budget to zero at the end of the month? How do bills get paid? Don’t worry. I’m going to answer all that and more below.
Why should you use the cash envelope budget? Here are some statistics that might convince you:
• If you pay with cash, you assign more value to the item you purchased. (New York Times)
• People spend 12-18% more when they use a credit card instead of cash (NerdWallet)
If you’re interested in other budget options, I have posts on: 60-20-20 Budget, 50-30-20 Budget, and The Anti-Budget. I also have an entire book on Personal Money Management <<<click there to check it out!
Table of contents
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Cash envelope budget: how it works
The first thing you’re probably wondering is “How do you start a cash envelope system?”
First, you’re going to set up a budget. You might already have one (in which case this is going to be a lot easier). A very simple example: let’s say your take-home pay for the month is $3,000. Your normal monthly bills cost $1,200. You also put $300 aside each month for emergency savings and investments. That leaves you $1,500 for the other categories in your budget. You look at your normal spending and decide to put:
• $500 for groceries
• $100 for gas
• $100 for clothing
• $150 for household (such as maintenance, cleaning products, etc.)
• $100 for personal care (such shampoo, toilet paper, etc.)
• $200 for medical
• $100 for auto repairs and maintenance
• $100 for dining out, movies, etc.
• $50 for vacation fund
• $50 for gifts
• $50 miscellaneous
Second, you’re going to pay your regular bills like normal, whether that be online or with a check. You don’t need to withdraw cash to pay your regular bills. These are fixed expenses that rarely change.
Third, you’re going to make up your cash envelopes. You can use colored paper, buy a cash envelope wallet, or you can use the free printable cash envelopes below.
Fourth, you’re going to withdraw your cash to fill your cash envelopes. Let’s say you get paid twice a month. When you get paid the first time, you’ll withdraw half and add to envelopes. When you get paid the second time, same thing. Withdraw the cash and spread it between the envelopes.
Lastly, you’re going to stick to the money in the envelopes. That’s easy to say and harder to do. If you go to get groceries and forget your envelope, you have to go back and get it. Don’t use your debit card and guess how much is left. If you have $200 left in the envelope and your total comes up to $207…you have to put back $7 worth of groceries.
You can’t shuffle money from envelope to envelope! This is a vital part of the cash envelope system. You have to curb your spending in some areas, no matter how hard it is. The whole point of the envelope system is to stick to your budget.
However, if month after month you have extra money in one envelope and are always running short on another, you can adjust your budget. One reason that people fail with budgets is that they think they can never be changed. Budgets are flexible, living organisms that will change over time.
The Importance of Goals
One way to stay motivated to stick with the cash envelope budget is to have a big goal that you are aiming for. Whether it’s becoming debt free, starting a retirement savings account, or buying a house.
If you get my Free Printable Budgeting Binder, there is a goal-setting worksheet in there. If you want the entire system of goal-setting, check out this years Free Printable Planner (visit home page (sign up sheet at top) or go to “Printables” in the menu at the top…it will be listed underneath there).
My husband and I had an original goal of becoming debt-free. We did. Then it was to start an investment account (which we did). Right now, we’re focusing on continuing to contribute to retirement (approximately 12% of our income goes there) and pay off our house.
No matter where you’re at on your financial journey, having a big goal in mind will help keep you motivated when you’re tempted to cheat on your budget.
How to budget to zero at month’s end
One reader question I received was: “How do I end the month?” You’re going to have cash left over in some envelopes. What to do with the cash depends upon the envelope.
For example, you would let “auto repairs and maintenance” build up. Because when something needs fixed, it’s going to cost a lot more than $100. And won’t it be wonderful when the car breaking is no longer an emergency, but something you’ve already got the money to fix!
For categories such “groceries” and “dining out,” you have two options.
The first it to take the extra money and put it into savings.
The second is to simply let it roll over to the next month.
I highly suggest the savings option. Savings includes paying off debt, filling your emergency fund, and building your investment account. Your long-term goal is going to be able to live your retirement in comfort. Which means you’re going to need a big chunk of change. You might think that $5 left in groceries won’t help. But trust me, it will add up.
Alternative envelope budgets
The cash envelope budget has a couple of alternatives that you can try.
- If you don’t want to have envelopes for 20 different categories, there is an easier way to do it. Pick the categories that you tend to overspend on- such as groceries, dining out, and clothing. Just make envelopes for those categories and use your credit or debit card like normal for all the other categories.
This system allows you focus on those areas that you’re having trouble with. It’s easier to implement since you’re only dealing with a mild change to your budgeting system.
- There is also the cashless envelope budget system. Though I’m not a fan of it. It defeats the entire point- actually seeing the cash you are spending. With it, you make up your categories and envelopes like normal. But you use your debit or credit card. You track it on the empty envelope like you would if you were spending cash. And you MUST stick to the rule to stop spending when your envelope doesn’t have any “cash” left in it.
Questions & answers
What are the categories of envelope system?
Don’t get worried if the categories in my example above don’t match your lifestyle. You can make up any categories you want. If you want to combine groceries and dining out into “food,” go ahead and do that. If you want to add a category for hobbies, feel free. The categories are what you want them to be and will be different for every individual. Because we all live different lives and have different spending priorities.
What is my pay (or my spouses) changes regularly?
You have two options if your income is irregular:
The first is to go with the LOWEST amount you make. Make your budget around that amount. On months you make more than the lowest, you can put the extra towards savings or spread it throughout your envelopes.
The second is figure out your AVERAGE monthly income. Make your budget around that amount. On months you make more than the average, set that money aside to fill your envelopes on months when you make less than the average.
What if I do if both my spouse and I buy groceries?
Make two envelopes- one of you and one for your spouse. If he only picks up little items, maybe only give him $50 and keep the $450 in your envelope.
When I run out of cash, I use my credit card. How do I stop doing this?
Leave your credit card at home! You can’t use it if you don’t have it with you. If you’re worried about needing it for emergencies, stick it in a little Ziploc bag and tuck it in the bottom of your purse. Away from the regular cash. This will make you stop, dig for it, and have to open the bag before you can use it. This might give you the time to re-think using the card.
I keep taking cash from other envelopes. How do I stop this?
Only take the envelope with you for what you’re going to buy. If you’re going to buy groceries, leave the other envelopes at home. Leave the debit card at home. If you only have $250 in cash with you, you’re forced to stick to your budget.
I don’t feel comfortable carrying that much cash. What do I do?
Only take the envelopes with you that you’re going to be using. There is no need to take your dining out/movies money to the grocery store. And vice versa.
What do I do about online purchases?
First of all, if you’re buying online, I highly recommend you use Ebates to get cash back. (Plus you’ll get a free $10 after your first purchase through them. It’s free to join).
Then, after your purchase you have two options. The first is to deposit the money back into your bank account. The other is to take it out of the envelope and withdraw less next month. (Example: you bought $100 worth of clothes online. Instead of depositing that cash back in the bank, just leave it in the clothing envelope and don’t withdraw that $100 next month).
What if my spouse and I get paid on different schedules?
This one is easy! Just break down your budget into multiple parts. Let’s look at our $500 of groceries. You husband gets paid once a month. You get paid every other week. When you husband gets paid, take out $250 for groceries. Each time you get paid, take out $125 for groceries. That gives you $500 for the month and allows you to withdraw money as you get paid.
My bank account balance is really low and I worry about that. What do I do?
This is a great question! And one near and dear to my heart. I suggest building up a cushion. For example, in our budget above $300 goes towards savings (debt, emergency fund, retirement). One month, just let it sit in the bottom of the account. The next month, go back to putting that savings where you normally put it. A little cushion won’t hurt and if a fixed expense suddenly increases, and is automatically debited, you won’t have to worry about an overdraft fee.
It’s not for everyone
As with any budget, there are some cons you should be aware of.
• You need to carry a lot of cash. This makes some people nervous.
• There are better budgeting systems available, depending upon your personality. For some people, this system is exactly what they need. For others, this system might not be for them.
• You can’t take advantage of credit card rewards.
• Multiple people can make the system even more complicated- it’s a lot harder to ask husband to drop by the grocery store when you have the grocery envelope.
• Multiple categories in one transaction (say at Wal-Mart) can be complicated
• If you’re low on money to start with, getting the cash is going to be more difficult. Especially if you’re used to swiping your card, then not having to pay that bill for a month. You’re already a month behind on all your expenses just because of the way credit card billing cycles are set up.
Free printable cash envelopes
• Print options: regular paper works perfectly.
• The file with 5 different design option is in pdf below. Just hit the “download” button. (The file is fairly large due to the images, so it might take a minute to download).
• Once you’ve printed your envelopes, cut them out.
• Fold them at the solid black lines.
• Use a glue stick (don’t use runny glue) or tape on the small rectangles. Fold the rectangles over to make your envelope.
It’s all up to you
I can give you all the details about the cash envelope budget. I can provide free printable cash envelopes. I can even tell you about the common obstacles and how to overcome it.
But it all comes down to you. No one in the world can MAKE you start budgeting. Or spend less. Budgeting takes work and self-control. But if you want to be financially successful. If you want to stop worrying about finances. Then adopting some sort of budgeting system is a must.
If you have any questions I didn’t answer in this post, please comment! I’ll be happy to answer (and edit the post to include your question).