What is the Cash Envelope System?
The cash envelope system is a way for you to limit as well as track how much money you’re spending and where you’re spending it.
I started using cash envelopes at the beginning of my debt free journey and continue to do so to this day. Not only does it make it waaaay easier for me to stay within budget, but I make better spending choices when I can physically see how much money I have left.
The general idea of a cash envelope system is deciding which categories in your budget you can pay cash for, withdrawing cash for each category, and stuffing it into its designated envelope. When it comes time to pay for something, only use the money that is in the designated envelope.
When it’s gone, it’s gone.
The Step-by-Step Process to Using a Cash Envelope System
1. Create a budget
In order to start using the cash envelope system, you will need to create a budget.
If you’ve never created a budget and don’t know how much to budget for each category, I suggest you track your spending for a month. Doing this will allow you to get familiar with your spending habits and get a better idea on your budget amounts.
To track your spending, write down every single purchase you make in a month. Make sure to write down the amount and spending category. At the end of the month, total up the amounts by category so you can get an idea of how much you typically spend.
2. Determine your cash envelope categories
Once you’ve created your budget, decide which categories will be part of your cash envelope system. If you make online payments for certain items, make sure to leave money in your bank account to cover these charges.
A few common examples of cash envelope categories are:
- Eating Out
- Misc. Spending
3. Withdraw your cash & stuff your envelopes (or use cash dividers)
Now that you know how much money you’ve budgeted for each category, withdraw your cash. I do this every payday so I don’t mess up my budget by swiping my debit card before I’ve sorted out my money.
Separate your cash in labeled envelopes or you can use cash dividers in your wallet. I use a set of plastic dividers, like the ones below, that you can find in my shop:
5. Use the cash in your envelopes when making a purchase
Remember to only use the cash in the designated envelope when making a purchase. If you feel like you need more money, (or have some left over) for a certain category, you can make adjustments the next time around.
In my experience, the cash envelope method has helped my spend less because I can physically see my cash leaving. I also love it because there are no overdraft charges, your budget becomes tangible and and lastly it works!