A Beginner’s Guide To The Cash Envelope System

Over time, my debit card had become my best friend and my worst enemy. I used it everywhere. The small market up the street from my apartment. The coffee shop near my office. On Amazon Prime for…basically everything. Spending my money had become so easy, and it was suddenly too easy. I was swiping my debit card so much, it began to feel like I wasn’t spending actual money at all.

Mindless spending became my norm, and soon, so did emptying my checking account. Week after week, I found myself counting the days until I’d get paid — only to repeat the same cycle over again. Even worse, I was relying on credit cards to help fill the gaps between paydays.

It all changed the day a good friend introduced me to the cash envelope system for budgeting. After scouring the Internet to discover everything I could about the system, I’ve been following it for a few months now. Here’s what I’ve learned so far — and everything you need to know to get started:

What It Is

The cash envelope system is a method for setting and maintaining a budget where you use cash for most of the spending categories in your life. You keep that cash in different envelopes to stay on track and organized.

Who It’s Best For

The cash envelope system works best for people who prefer a tactile way of thinking and working. It’s literal and tangible — you set a budget for yourself and keep cash on hand for that exact amount. Unlike a debit card, you actually see the cash you have and the cash you spend.

How To Get Started

1. To begin, track your spending for a few weeks. Save receipts, keep a list, organize a complicated spreadsheet — whatever works best for you. Not only will you have a good sense of what you’re spending your money on, tracking is the first step to becoming more mindful of your financial habits.

2. Categorize your spending. After tracking your spending for a few weeks, break your purchases into categories and add up how much you’ve spent in each one. As you figure out the areas of your budget, you’ll also need to decide which things you’ll continue to use your debit card/bank account for, and which you’ll use cash for. For example, if your gym membership auto-deducts or you always pay your electric bill online, there’s no real reason to incorporate them into your cash envelope system. Just don’t forget them when figuring out your overall budget.

My spending categories are: Transportation (which includes gas for my car and the occasional Uber), Groceries and Household Necessities, Recreation (which is mostly dinners out and drinks with friends), Shopping (which speaks for itself, though I sometimes lump trips to salon and manicures in here, too), and ETC. (which I use for incidentals that don’t quite fit into my other categories, like birthday presents for friends).

3. Set limits for each category. After you’ve figured out the categories you’ll use cash for, set a limit for each one based on what you learned by tracking your spending. You’ll also need to decide how often you’re going to withdraw your cash. For me, taking out the entire month’s worth of cash at once seemed like too much, so I broke my budget into two-week increments. I take out cash every other Friday when I get paid.

4. Get to the bank and withdraw that cash.

5. Experiment with how you’ll keep your cash organized. You can use plain office envelopes, or ones specially designed to use with the system. If you’re looking for something more purse-friendly, there are dozens of wallets and divided organizers on sites like Etsy.

When I first started using the system, I used clear, zippered sandwich bags to keep my spending cash organized. It wasn’t glamorous, but being able to see the cash in each category really helped me be more mindful of the progress I was making. (I’m now using a divided wallet like this.) Whatever you decide to use, write the category on the front, along with how much cash you’re starting with.

6. If you drain one of your spending categories, you can always pull from another. It’s normal for this to happen as you’re learning the system, but once you’re up and running, you should try to avoid doing so as much as possible.

7. Deposit leftovers into savings. When it’s time to withdraw again, whatever cash you have left over in your envelopes gets deposited into your savings account.

Tips and Tricks

Take a deep breath. For me, the pivot to using cash for my daily spending felt foreign. I wasn’t used to standing at the checkout line, fumbling for bills and coins to hand to the cashier. It took some time, but I eventually got over that awkward feeling — and you will, too.

Break it down. After you get comfortable using the cash envelope system, it’s helpful to think about what types of bills work best for each of your spending categories. I made a small cheat sheet the breaks down the number of each type of bills I need (five 20s, three 10s, etc.), and I hand it to the bank teller every two weeks when I make my cash withdrawal.

Deposit back. Sometimes, using your debit card is simply unavoidable (like having to make a purchase online). When that happens, I pull the cash from the corresponding category and deposit it back into my checking account.

The Advantages

The cash envelope system is a much more mindful approach to budgeting because it forces you to be aware of how much you’ve spent and how much you have left in each category.

It’s also completely customizable, so you can figure out exactly what works for you. Need eight spending categories? Go for it. Prefer to just have one envelope of cash that you’re spending from? If it works for you, it works for the system.

You can also change how much money you place in each envelope as often as you’d like. If summer is your social season, set aside a little more during those months. If you, like me, plan to hibernate all winter, scale back your fun fund for a bit.

The Disadvantages

Stopping by the bank and ATM on a weekly basis can definitely become tedious. But for me, the advantage of having that cash on hand far outweighs the inconvenience. And feeling comfortable using cash can be tough at first, but it’s easy to overcome after you get used to it.

The Outcome

I’m still learning, but the cash envelope system has already helped me be better with money. I’m working my way toward my financial goals, and I’m definitely planning on sticking with the system.

Jessica lives in downtown Cleveland and works as an associate creative director at a communications agency. When she’s not having her heart broken by Cleveland’s sports teams, she’s busy stalking all of the dogs in her neighborhood. Follow her on Twitter @jessaforrester and feel free to send flowers and/or coffee. 

Image via Unsplash