How to Start Using the Cash Envelope Budgeting System

Start using cash envelope system

How you can Begin using the cash envelope method to save your budget

Have you heard of the cash envelope system? Have you wondered how on earth you start using cash to pay for things instead of a credit card? How does that even work?

Well I am here to help you figure out a cash envelope system that will work for you.

If you have been looking around for budgeting tips, you have probably seen the cash envelope method mentioned. Dave Ramsey is a big proponent of using cash when paying off debt.

But using cash can seem a little outdated to use cash. After all, plastic is so easy to “Swipe and Go!”

And while that is true, easy doesn’t always mean better. 

Using cash to pay for certain areas in your budget can be an enormous budget saver.

Seriously, it can mean the difference between staying in your budget, and making progress on your financial goals, and wondering why your budget isn’t working every month.

What is the Cash Envelope System

As a quick recap, the cash envelope method is a simple way of setting a certain spending amount for areas in your budget.

Then, instead of paying for things with your credit or debit card, you use cash (ONLY) for certain budget categories

Once the cash for that category has been spent, you can no longer spend or buy anything from that category until your next pay day, when money is added to the category envelope again.

For example–Let’s say you plan to spend $100 on eating out for the month. When you go to eat out, pay for your meal(s) with the cash from the “eating out” envelope.

Once the cash in the envelope is gone you can no longer eat out, since you have no more money specifically for that category.

This means that you stay within your budget! No more over-spending and wondering where your money went.

How to Start Using Cash Envelopes

Whenever you start something new, it can feel overwhelming. This is definitely true when making changes in how you deal with your finances.

So give yourself some leeway as you get started using cash envelopes. The biggest trick is to NOT give up. Keep working at it. Keep trying. As long as you don’t quit, you will get it and have success.

Create Your Budget

I’m going to be honest. Starting to use cash envelopes without having a set budget is a waste of time.

You need to have a working budget set up for your household before you can do anything else. So if you haven’t created a budget that works for you, that is the first thing you need to do.

Here are some articles to help you get started:

Beginners Guide to Budgeting
How to Budget when Money is Tight

Once you have your budget ready, then you can move forward.

Track Your Spending

As part of working out your budget, you need to know where your money is going every month. This will help you know how much to assign each cash envelope each month.

You can track spending in two ways.

  1. Take the next month or so and diligently track every dollar you spend. Save your receipts. You can keep track of your expenses in a notebook, in a spreadsheet, on a sheet of paper. Anywhere that works for you. But track your spending for a whole month.
  2. Pull up your credit card statements, bank statements and any receipts you have for the last 1-3 months. If you pay for everything with a card, then this will work well.

Tracking your spending is a big part in helping you know how much to put in your cash envelopes so that you can be successful.

Separate Expenses

Once you have tracked your spending, the next step is to figure out how much you spent during the month, and where.

So you need to go through all the expenses you tracked and categorize each expense paid during the month.

This part could take some time. But it is very important to have a clear idea of your money habits in order to start creating better habits and make progress on your goal.

So go through your expenses for the past month and divide those expenses up into categories. Look for common themes such as:

Groceries
Eating Out
Entertainment
Utilities
Insurance
Gas
Miscellaneous
And so forth..

Group similar expenses together so that you know how much you spent in each category for the month.

Using Cash to pay for certain areas in your budget can be a HUGE budget saver!

Divide Fixed Expenses from Variable Expenses

When it comes to your finances, there are some budget categories that are considered “Fixed Expenses”.

These are the monthly payments that do not change in value from month to month. These are things like Rent/Mortgage, Insurance, Utilities, Car Payment, etc.

Variable expenses are the ones that DO change in how much was spent from month to month. Things like Groceries, entertainment, beauty, etc.

Your variable expenses are going to be the ones to start using the cash envelopes for.

Choose Categories and Set Budget Amount

Once you know how much you spent in each of the variable expense categories, pick a couple that you want to start paying for with cash.

Use your tracked expenses from the past month to set a cash amount for that category.

This is why the tracking was so important… you need to know how much you spent so you can give yourself a place to start from.

I recommend picking no more than 2 or 3 cash envelopes to start with. You can always add more as you get more comfortable with it. But you don’t want to overwhelm yourself with too many all at once.

So pick the 2-3 categories that you want to work on the most and go from there. Use what you discovered in your tracking from the past month, and set your budget amount for each category.

Remember, as you go along and get better at using cash and budgeting, you will make tweaks to these amounts. Nothing is set in stone here.

cash envelopes with category ideas

Pull Out Cash

The next step in your cash envelope system is to decide when you want to pull out your cash. Whether you choose to do it at the beginning of each week, or on payday to last you until the next pay day, or at the beginning of the month. When you pull out cash is totally up to you.

But make a plan and stick with it for a while to see if it works. You can always adjust when you go to the bank later on if what you try isn’t working. 

Add up the total amount of cash you will need for all of your envelopes and go to the bank! Withdraw the exact amount and get ready to put your dollar bills into the specific envelopes.

Create Envelopes

In order for the cash envelope system to work, you need a separate envelope for each category you want to pay with cash.

Your envelopes do not have to be fancy. You can use regular, white mailing envelopes if that is what you have. There are lots of options for fun envelopes on Etsy, Amazon and even Pinterest. 

But don’t feel like you need to spend extra money to do this. Just have some envelopes on hand, and write the category on the outside of each.

Stuff Your Envelopes

This is the fun part! Stuffing envelopes! Now that you have pulled out the cash and have evelopes ready, you are ready to stuff them.

How much you put into each envelope will be determined by the budget you set for it.

So if I decided I needed $250 in my grocery envelope for the next 2 weeks, I would add that exact amount to the grocery envelope.

And keep going down the line until all the cash is divided into all the envelopes.

Take Envelopes to the Store and Track Expenses

This step may seem kind of self-explanatory, but how many times have you gone grocery shopping and forgotten your grocery list?

If you are going to start using cash envelopes, then you need to take the cash envelopes with you when you go grocery shopping.

What’s more, when you are buying groceries, only use the money from the grocery envelope.

Each time you make a purchase from any envelope category, make sure to track the expense. This will help you keep track of how much you have spent/have left to spend and thus help keep you within budget.

Once the money from an envelope is gone, that means you can’t spend in that category anymore.

No cheating and taking from another envelope or using your credit card. Be mindful of what you buy, and how much you spend.

Using cash is meant to help save your budget, not just another way to cheat on your budget.

If you find that there just isn’t enough money in your envelope each month, then you need to rethink your budget amounts.

If you are always “borrowing” from another envelope to finish off your grocery bill, then consider increasing your grocery budget for awhile.

Again, you will fiddle and tweak with the amounts until you get an amount and system that works for you and your family. 

Best Tips for Using the Cash Envelope System

Track Your Spending. I mentioned this above, but it is crucial to the success of the cash envelope system, and your budget overall. Any time you make a purchase from an envelope, mark down the transaction and amount. This will update how much you have left in the budget/envelope and help with you succeed with your finances.

Have your budget be part digital and part cash. I find it best to pay for routine bills through automatic bill payments. So things like insurance, utilities, phones, cable, etc. These are bills I do not recommend paying with cash. You will spend so much time running around all those places trying to pay and it just isn’t worth the time or trouble.

Set up automatic payments for regular bills. Use cash for when you are physically going into the store.

Have a second cash envelope for your spouse. Have you ever been trying to stay on a budget but your spouse calls and says “Can I get some milk from the store for you?” It happens all the time in our house.

So how does this situation work with cash? Let’s say your grocery budget is $350. Create a separate cash envelope that your spouse can use for such occassions. So the main grocery envelope has $300, but your spouse gets one for $50 for those small post-work shopping trips.This way you are staying in budget and not resorting to the credit card

Leave the Credit Cards at Home. If you are worried about cheating on the cash budget system, then the easiest way to avoid cheating is to leave your debit/credit cards at home. If you don’t have them on hand at the store, then they can’t be used at the register.

Choose a category your struggle with. Don’t know which category you want to start using cash envelopes for? Pick the ones that seem to be the hardest to stay in budget.

The biggest budget buster is usually groceries. So definitely start with a grocery category.

Then maybe add in personal spending or entertainment.

If you notice, from your tracking, that you are spending too much money in a certain category, and want to cut it back, then pick that category to start using cash.

Don’t keep all your cash with you. You don’t need to have your cash envelopes with you at all times. Only take them when you know you are going shopping. This will help you to spend less (afterall, no cash on hand= no shopping).

But you will also prevent yourself from possibly losing your cash envelopes. That has happened and it can be devastating.

If you do want to keep some cash on hand, I recommend having a cash envelope labeled as “Miscellaneous” to catch those small expenses throughout the month.

What about buying things online. Sometimes buying an item online is unavoidable (hello Amazon!) So how does that work if you are a cash budgeter?

In this case I recommend having an envelope marked as “online purchases”. When you buy an item online, figure out which category the item is in.

Then take the amount you paid for the item, and remove that amount from the category envelope–so you can’t spend that money on something else. Place that money from the category envelope, and put it in the “online purchases” envelope.

The next time you go to the bank to take out cash, deposit the money in the “online purchases” envelope back into your bank account. This will keep your finances and cash payments organized. 

What do you do if you have money leftover? Did you get to the end of the month/pay period and you have extra money in your envelopes? Congratulations!! That is a wonderful place to be. But then you have to decide what to do with that money.

The good news is: You get to decide! The bad news is: the options are endless. 🙂

This is where you look at your financial goals and decide where that money would be best put to use. Are you trying to save for your emergency fund? Are you trying to pay down debt? Are you trying to save for something bigger or wanting to start sinking funds?

Look at your where you want to be with your finances and decide the best place where that leftover money can go.

Final Thoughts on the Cash Envelope System

Whew! I promise that using cash envelopes is not complicated. But starting anything new can feel confusing and overwhelming.

If you want to have success with cash envelopes, I highly recommend going through this post step by step. Don’t go onto the next step until the previous one is done.

Using cash to pay for your expenses really can be a huge budget saver. I encourage you to try it out. 

Are you a cash budgeter? What is your best tip for using cash envelopes? Do you want to try cash envelopes? What is holding you back? Leave me a comment and let know your thoughts.

Make sure to pin this for later!

How to Start Using the Cash Envelope Budgeting System

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