Cash Envelope System - Featured Image
25.07.2022

A Guide to the Cash Envelope System +4 Interesting FAQs Answered

by Milos Djordjevic

Are you looking for a comprehensive, efficient, and effective budgeting system to help you cut down on expenses and make it to the next paycheck? Do you want to spend less money in your daily life?

Then you need to learn about the cash envelope system. This article will teach you what it is, why it will change your spending habits, and how to stick to it.

What Is the Cash Envelope System?

The cash envelope system is a simple way to budget that uses cash envelopes to help you spend less and stick to your spending threshold. 

This system is most effective for those used to relying on debit and credit cards, as it replaces invisible digital money with cash you can touch and feel. In sum, you’ll be tricking your brain into hating spending more than you need to. 

Bear in mind that you can only regulate variable spending through the envelope saving method. Fixed expenses, such as mortgages or car payments, don’t fit in this system.

1. How to Start a Cash Envelope System

Starting a cash envelope system doesn’t require much. You just need to know what your monthly income is and how you spend it, and buy a couple of envelopes to put your money in. The first step requires keeping track of your spendings for at least a month. 

While you don’t need to buy anything besides envelopes to start saving money in envelopes, this system still takes effort and time. For more information, follow our step-by-step guide below.

2. How Does the Cash Envelope System Work?

Create a Budget

First of all, you have to create a budget. To decide how much money you should spend per month, track your expenses through receipts, bank statements, and credit card reports.

Make sure to create a budget you can afford. The envelope method to save money won’t be effective if you don’t know your post-tax income and how much of that goes into fixed payments. You need to have a solid idea of how much cash you have at your disposal.

Now that you know how much money you have every month, it’s time to think about categories. 

Divide Your Expenses into Categories

Now, it’s time to look at your expenses and divide them into different categories. Keep track of how much you spent on each type.

You’re bound to notice you spent too much money on something, but don’t beat yourself over it. Thanks to this envelope budgeting system, you’re going to do something about it.   

Let’s take a look at some of the most common envelope categories:

  • Groceries
  • Eating Out
  • Fun
  • Pets
  • Clothes
  • Hobbies
  • Gas
  • Emergencies

You can add and remove categories as you like. 

Set a Spending Limit for Each Category

Now comes the hard part: you have to set a spending limit on all categories. 

Be realistic—don’t set extremely low or high limits. Calculate how much you can afford to spend on each category, and treat priority categories more generously than those for more indulgent purchases. 

The goal is to have some money left over after you’re done with your envelope budgeting, so try and work around that. This task can be challenging, especially if you’re trying to save money on a low income, so don’t be demoralized if you can’t spare that much. Something is still better than nothing. 

Fill the Envelopes with Cash

Finally, something easy. It’s time to stuff those envelopes with cash. As we mentioned before, the whole point of this system is to stop using credit cards. 

You’ll have to physically take money out of an envelope each time you need to buy something, which will hopefully help with curbing unnecessary expenses and impulse purchases.

Did you know you can get a good cash envelope system wallet for really cheap? It’s small, handy, and comes with 12 envelopes and one binder note to help you organize everything neatly. Check it out here for yourself

Adjust as Needed

You’re probably not going to nail every budget on your first try. You may overfill some envelopes while neglecting others, so you need to adjust your envelopes as you go.

We mention variable spending for a reason: even if you assign the exact amount of money you spent last month to each category, it’s likely to be either too much or too little. Feel free to take notes on what worked and what didn’t for next month’s budgeting. 

3. How to Save Money Using Envelopes

We’ve already mentioned that the cash envelope system is one of the most functional, straightforward, and efficient budgeting methods available today. 

But did you know there’s another envelope-based challenge you can undertake to save even more money? It’s called the 100 envelope challenge, and it can help you save a great amount of money over a couple of months. 

Let’s briefly explain what it’s all about. You start with 100 envelopes, number them 1–100, and put them in a drawer or basket. Draw an envelope every day and put the corresponding amount of money in it.

Ideally, you can draw an envelope each day for 100 days, but you might want to draw one every three to four days instead, which will make the challenge last a whole year. You can extend or shorten the duration of this challenge to your liking.

At the end of the period, you’ll have saved a little over $5,000!

4. What Are the Pros and Cons of the Envelope System?

As much as we’d like to think of the cash envelope system as a perfect saving method for the modern age, it has its minor and major flaws. Let’s take a look.

Pros

  • It will force you to plan your expenses ahead of time.
  • It makes it harder to impulse-buy stuff you don’t need.
  • It forces you to face your monthly expenses and figure out a way to reduce them.
  • You’re not getting credit card debt or worsening your financial situation.

Cons

  • Paying for bills with cash can be difficult.
  • You might be walking around with a lot of cash-filled envelopes, which can prove dangerous. Our advice is to carry only the cash you’ll need for the day.
  • Figuring out a budget takes time and effort.
  • If you live with your partner, it might prove challenging to share envelopes.

So, who is the envelope money-saving method best for? We recommend it for people who live alone and need a solid system to motivate them to think about saving money, even if it comes with some downsides. For example, this system is becoming more and more popular  for college students.

Cash Envelop System: Conclusion

As you can see, the cash envelope system is easy to get into and pretty handy overall. However, it’s not perfect by any means and comes with some significant downsides, so it’s important to make sure the system fits your needs before you commit to it.  

Still, it’s a pretty flexible system, and with some minor tweaks, we believe you can make it work for you. So what are you waiting for? 

Thank you for reading, and good luck!