When I initially made the decision to get my financial house in order (once and for all), I knew that I needed to get a handle on my spending. As a working mom and wife, balancing everything, I often found myself losing track of what I spent throughout the month. And, I didn’t think twice about my spending until I was in the uncomfortable position of running low on cash before payday rolled around.  My solution to the problem… the cash envelope system.  

What is the Cash Envelope System?

The cash envelope system is a style of budgeting where you use cash for the majority of your household spending. With the cash envelope system, you break your spending down into various categories based on your household budget. You keep cash on hand, separated out in different envelopes to keep yourself organized and on track with your budget.

Why Cash Envelopes?

If you’re struggling with getting a handle on your household spending, cash envelopes are a great way to reign it in. There are several reasons why a cash-based spending system works. 

1. We spend less when we use cash.

Simply put, we have a greater emotional attachment to cash than to our plastic credit or debit cards. 

2. Cash spending is more intentional.  

Credit cards make it too convenient to spend beyond our means on things that we don’t need. But on the other hand, when I go into the store with cash, I keep track of my prices as I shop so there are no surprises at checkout. No one wants to be embarrassed at check out and have to put back items from your shopping cart.  

3. Cash is easy to track and reconcile.

Once you assign your dollars to a designated envelope, count it as money spent within your budget. However, this only works if you stop spending when the money runs out.

The Beginners Guide to Cash Envelopes

Best Practices for the Cash Envelope System:

1. Create a budget first.

Otherwise, you’ll have no idea how much money to assign to each cash envelope. You can even get started with budgeting if you’re currently living paycheck to paycheck

2. Start with a small number of cash envelopes, perhaps two or three.

Starting small will give you an opportunity to see if cash spending works for you. When you start with fewer envelopes it’s also less overwhelming. I recommend starting with dining out and groceries. Food is a notorious budget buster. Transitioning to cash spending in these areas will likely result in immediate savings. 

3. Begin with the spending area that you struggle with the most.

You may be able to easily identify these areas of struggle. If not, take a retroactive look back at your spending over the past 3 months and see what jumps out at you. Back at the start of my financial journey, my struggle areas were dining out, groceries, and personal spending. At the time a lot of my discretionary (or leftover money) was being devoured by one of these three areas. Before I figured this all out, my tiny family of 4 at the time (two relatively small adults and two toddlers) were spending an average of $700 on groceries and another $300 or so at restaurants and drive-thrus. Thankfully, cash envelopes helped me get things back on track. 

4. Decide how often to fill your cash envelopes.  

I like to fill my cash envelopes once per month when I set up my household budgets. But you can decide on the frequency that works best for you and your cash flow. Cash envelopes can be filled weekly, bi-weekly, or monthly. 

5. Find a place to store your loose change.

Once you start doing most of your household spending in bulk, you’ll end up with a ton of leftover coins. I store mine in a jar and enlist the help of my girls to count it all up. It’s a great exercise to show the kids that coins are valuable and can add up nicely. 

6. Don’t borrow from envelopes.

It’s best to avoid the temptation to ‘borrow’ from one envelope category to spend in another area. Borrowing from envelopes can confuse things when you reconcile your budget at the end of your budgeting cycle.

Options for Storing Your Cash:

1. A cash envelope wallet.

This is a great option if you like to carry all of your cash around with you. I personally prefer to only take the cash with me that I intend to spend during the day, so I’ve never carried a cash envelope wallet with me. But I highly recommend this cash envelope wallet if you want to give it a shot.

2. Laminated cash envelopes.

These envelopes are durable and hold up well with repeated use. I’m currently using these laminated cash envelopes to store my cash each month.

3. A coupon organizer.

The organizer serves the same purpose as a cash envelope wallet but is a better option if you prefer to keep your cash at home.

4. Plain white envelopes.

This is how I started my cash envelope journey. The only problem is that the envelopes aren’t durable. You’ll end up going through them quickly and replacing them often. But this option is great for those just starting out with cash envelopes and for those on a tight budget that won’t allow for fancy wallets and envelopes.

Final Thoughts

When it comes to cash envelopes, practice makes perfect. You won’t get it right the first month, but it does get easier with time. And the reward at the end is more discretionary money to use to advance your financial goals. 

Have you tried the cash envelope system? What has your experience been?