Easy Guide to Cash Envelopes

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Do you find yourself constantly busting your grocery budget or spending too much on shopping sprees? Have you ever regretted a purchase, wondering why you bought it in the first place? Do you want to get a handle on your spending habits? Then reading this easy guide to cash envelopes is your answer!

As of July, my family is officially debt-free! We paid off $72,000 of debt, all on one income. It was tough, but cash envelopes helped us stay on track and changed our spending habits. By far, it continues to be one of the best money strategies we incorporated on our debt-free journey. I know it works, and it can work for you too.

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What are cash envelopes?

Cash envelopes are a simple way to manage your money and prevent overspending. To be honest, it’s probably how our grandparents or great-grandparents handled their money. First of all, you set a monthly cash budget for a category. Next, take the cash out of the bank and physically stick it in an envelope. Finally, spend only the cash from that envelope for that category. Once the money is gone, you’re done spending. You don’t borrow from another envelope, swipe your debit card, or pull more money out of the bank. It’s just that simple.

Why do cash envelopes work?

Cash envelopes force you to stay within budget. Cash sitting in your wallet is a physical and tangible amount. It’s not an estimated balance in your checking account or credit card. With each purchase, you’ll count out and hand over cash. This creates a physical and psychological awareness, unlike the connection when swiping a credit or debit card. In a recent study, consumers are willing to pay as much as 83% more when paying with a credit card than cash.

Cash envelopes force you to evaluate each purchase

Cash envelopes heighten your awareness of what you are buying and how much each item costs. When you have a limited amount of spending money, you’ll find yourself evaluating the pros and cons of each purchase. Do I really need this right now? Can I use something similar that I already own? Is there a cheaper option, or is this something that I can make myself?

Before using cash for groceries, I randomly walked each grocery aisle throwing items into the cart without checking prices or searching for cheaper products. I was brand loyal, so I would just throw certain items in the cart without a second’s notice. For convenience, I purchased sliced cheese or fancy packaged salad kits. When I found out how much I could save by simply slicing my own cheese and making my own salads, I was shocked. I immediately invested in a few kitchen products that helped me prep my food and have saved tons of cash in the process. Click here to learn more about which kitchen gadgets I use that save money. If I didn’t force myself to use cash at the grocery store, I would not have made the connection of how much money I was wasting.

Cash and blank envelopes

3 Easy Steps to Creating a Cash Envelope System That Works for You

1. Decide the budget categories for your cash envelopes.  

Only choose categories that you tend to overspend in. Regular, recurring payments like utilities, rent, and your mortgage should still be paid online. Here are some suggestions:

  • Groceries
  • Dining/Restaurants
  • Mad Money/Personal Spending
  • Hair/Makeup
  • Fun/Entertainment (Date Night and Family Time)

2. Decide on your monthly budget for each category, and fill your envelopes with cash.

Check your zero-based monthly budget for each cash envelope category, and withdraw that amount from the bank. Fill each envelope with the specified amount.

3. Only spend what’s in the envelope for that category.

Spend only the cash from each envelope for that specific category. When you run out of money, you’re done. It’s that simple. Don’t borrow from another category, or pull out more money from the bank.

Don’t increase your budget or add more cash to your envelope, except for cash gifts you receive. If you receive cash as a birthday gift, decide which cash envelope you would like to add it to. I usually add mine to either personal spending, dining or entertainment.

Recommendations on how to Set up your Cash Envelope

  • Use plain old envelopes and just write out your category on the front.

Plain cash envelopes for Mad Money, Date Night, Groceries and Dining.
Cash Envelopes

  • Use a small accordion file, label, and store your cash in each individual slot instead of separate cash envelopes.

Small green accordion file

Small Accordion File

  • Make your own budget-friendly DIY cash envelopes. I created my own version of cash envelopes since I hated lugging around plain, white boring envelopes. Plus, I made them just the right size so they can easily slip in and out of most wallets. I used these for over two years before I bought a cash envelope wallet. I created a free template download, and a quick and easy tutorial, click here to read the blog post and get your free download.

Cash envelopes: pink marbled labeled Date Night, tan marbled labeled Dining, aqua green labeled Groceries, and plant patterned labeled Mad Money. Notebook, pen, succulent green plant, gold paper clips, and gold and black small owl.

Quick & Easy DIY Cash Envelopes

  • Purchase a cash envelope wallet like this Savvy Cents Wallet. I bought mine a few months ago, and I can’t believe I waited this long to buy it. I absolutely love it! It’s stylish, functional, and I can easily access my cash without anyone knowing that I’m using cash envelopes. Click here on my review of the Savvycents Wallet. Click here for a male cash envelope wallet.

Savvy Cents Wallet

Inside of Savvy Cents Wallet

  • Keep a small accordion file or have separate cash envelopes that you leave at home. This is where you’ll store the cash you don’t need to carry with you at all times. I store portions of my dining or entertainment money in this accordion until I need to spend it. This is also a great way to prevent you from blowing your entire month’s budget in one shopping spree. Label one slot “Bank”. This is where you’ll stash cash from online purchases. You can either save the cash for next month’s cash envelopes or deposit the cash right back into the bank.  

Common Questions

1. What if I run out of money before the month ends?

Don’t take money from another envelope, even if you have enough cash to cover it. You’re training yourself to live within a budget and set spending limits on certain categories.

We failed miserably with our grocery cash envelope in the beginning. We estimated way too low but didn’t want to sacrifice certain items just to save money. Increasing the budget by only $50 a month helped us stay within budget. Another time, we found ourselves close to busting the budget by the middle of the month, but we didn’t give up. We got creative, used what we had, and made inexpensive meals for the rest of the month.

If you continuously run out of cash before the month ends, sit down and figure out why. First, check your budget, and assess if it’s realistic. You may need to adjust your budget until you find out what works.

If your budget is realistic and you’re still running out of cash early, figure out why and tackle your spending habits. Are you mindlessly spending, or spending most of your budget at the beginning of the month, and then feeling deprived for the rest of the month? Generally, I like to space out my personal spending for the month. I feel deprived and depressed when I don’t have any cash to spend. To combat this, I plan large purchases towards the end of the month, so I feel like I have money to spend for the entire month. Everyone is different, so figure out what works for you.

2. What if I pay for things online?

Immediately take the cash out of your envelope equivalent to your online purchase, and stash it away. I recommend setting up an envelope labeled bank, and store your online cash purchases here. You have three options. First, you can immediately deposit it into the bank or save it for next month’s cash envelopes. The third option is to spend it on categories that you normally use your debit card for like gas for your car. If having extra cash on hand is too tempting, then I suggest depositing it as soon as possible.

I’ve used a combination of both methods, but I usually save the cash for next month’s cash envelopes. This takes extreme discipline though. In the beginning, I wasn’t able to do this. I found myself treating the “bank” cash envelope like an ATM, and pulling out cash whenever I needed it. Now, I don’t have this problem, but $100 in my bank envelope is my limit. Once my bank envelope reaches $100, I’ll deposit it right back into the bank.

3. What if I have money leftover in a category?

Yes! Wonderful! You stuck to your budget, and have money left over. If you still have debt, use it to pay off debt. If not, decide how you’ll use that money now or roll it into next month’s budget.

Consider lowering your budget, if you consistently have money left over each month.

4. Do I use cash envelopes for regular monthly bills like utilities?

No, it’s easier to pay regular monthly bills like utilities, mortgage/rent, and car insurance online. Only use cash envelopes for categories where you must go to a physical establishment (store/restaurant/beauty salon etc.), choose your items/service, and then pay. Also, only choose spending areas that you tend to overspend in. If you’re able to stay within your grocery budget each month, then maybe you don’t need a cash envelope for it.

5. Do I pull out the entire month’s cash amount at the beginning of the month?

This is a personal choice. Some pull out all of the cash at
the beginning of the month. Some space out their cash withdrawals weekly or at
the beginning and middle of the month. Try a few methods to see what works best
for you and your family.

I like to fill my cash envelopes at the beginning of the
month. I’ve pulled out half of the budget for the month, once at the beginning
and then again at the middle of the month. Tracking the budget was a nightmare.
I found it too complicated and cumbersome to remember that I only pulled out
half of the budget, so it didn’t reconcile to my Everydollar budget. Now, I
pull out the entire budget in the beginning of the month, track my spending, and
the remaining amount always matches my Everydollar budget.

6. I’m afraid I’ll get robbed with all of that cash on me. What should I do?

Don’t carry all of your cash with you. Only take the cash that you need to spend. I keep most of it home, until I know I need to spend it. Some pull out cash weekly or twice each month. It depends on what you feel comfortable with. Either way, be careful when handling your cash. Don’t flash around how much cash you’re carrying. Always keep your purse and wallet next to you at all times.

Personally, I only carry the cash I know I’m going to spend. I feel safe knowing that I have enough cash saved in my emergency fund if I was ever robbed. Don’t get me wrong. Getting robbed with or without cash is devastating, but the amount t, I’ve saved with cash envelopes far outweighs the fear of getting robbed.   

7. How do I track my spending?

I suggest using a budgeting app like Everydollar. You can always do it the old-fashioned way and track each purchase on the envelope or in a small notebook. Every couple of days, I count out my cash to see if it matches my Everydollar cash envelope budget. I’ve made it a habit to log in all of my purchases as soon as possible. I can easily reconcile my cash to my Everydollar budget at any time.

8. How do I handle change/coins?

When I first started out, I tried keeping the change with its own category. I even used Ziploc snack sandwich bags as cash envelopes,, so I could track the change with each category, but this only lasted a month. I hated how tacky the Ziploc bags looked in my wallet, and it seemed pointless to track every single cent back to each category.

Now, I just store all of the change together in my wallet’s zippered compartment, and empty it whenever my wallet gets too heavy. I stash the change in a small piggy bank and deposit the change back into the bank every few months. When I check my cash against my Everydollar budget, I round down the amount in Everydollar and make sure that I have that amount of cash in my wallet.

9. What do I do if it gets confusing or overwhelming?

First of all, take a deep breath and focus. You’re starting a new process and everything takes time. Don’t expect yourself to be a cash envelope expert from the very start. Give yourself enough time to adjust and make changes along the way. Figure out what’s not working and try to fix that problem first. Don’t give up at the first sign of trouble. I tried several different methods before I figured out what worked for me and my family. When frustration hit, I went back to the reason why I started using cash envelopes in the first place. Just like you, I wanted to get a handle on my budget and spending habits.

When I first started, I had too many categories for myself – personal spending, clothing, and makeup/hair items. I quickly consolidated all of the categories into one. Combining the categories made sense to me and made tracking costs so much easier. However, if one category tends to be your budget buster, then keep it separate. As always, your budget should reflect your spending habits and your financial goals. Find out what works best and don’t beat yourself up if you need to make changes next month.

Using cash envelopes is not normal in our society where swiping a debit or credit card is normal. It takes time to change your habits, but believe me it’s worth it. Figure out what works, and adjust it along the way to fit your needs.

10. What if I make a mistake?  

If you slip up, don’t beat yourself up. Just start over! Adjust your budget that month, and figure out what caused the mistake. Did you forget to track your spending? Is your budget realistic? Are you spending carelessly? Face the issue, figure out how to fix it. Adjust next month’s cash envelope or change your spending habits next month.

11. What if I need to change my categories or spending amounts?

Your budget and spending habits change and improve over time. Change and adjust your categories and amounts as you see fit. We now have a great handle on our grocery budget now. We don’t feel the need to use a cash envelope for groceries anymore. If we ever find ourselves busting the grocery budget each month, we won’t hesitate to flip back to using a grocery cash envelope.

Remember that certain months may require more spending. You don’t need to stick to a specific amount each and every month. If you have a holiday or a special event that month, increase the amount for dining out or groceries. If you haven’t already done so, check out how to create a zero-based monthly budget here.

Since becoming debt-free, we have increased some cash envelopes like date night and our personal spending money. If you increase your cash envelopes, just make sure that it fits your budget and your overall financial goals.

Final Thoughts about Cash Envelopes

Cash envelopes are a great way to stay within budget. It’s one of the oldest, easiest, and most effective ways to handle money. You’ll learn how to stay within budget, and learn how to distinguish your wants vs. needs. Cash envelopes changed my family’s spending habits. By and large, it was a key element in helping us pay off $72K in consumer debt in 31 months. Obviously, we will continue to cash envelopes, even after becoming debt-free because we know it works. Try it, what do you have to lose?

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Cash and envelopes with a cup of coffee and roses

3 thoughts on “”

  1. The process seems simple. It also feels overwhelming and intimidating. I like the idea of budgeting so much for the stuff you can lose track of, like dining out. Maybe I’ll start there. Thanks!

    1. Starting out with one category is a great start! Dining out is still one of the budget categories I struggle with. Good luck and let me know how it goes. Just trying out cash envelopes is a step in the right direction.

  2. I love using cash envelopes for dining, date nights, and family outings. I know how much I can spend for the month, and I’ve saved so much money in the process. It truly has been a game changer for our family finances.

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