Budgeting with Cash Envelopes

pink envelope
by Advice Chaser
by Advice Chaser

Have you ever had to leave groceries at the cash register because your debit card declined unexpectedly? Have you ever sworn that you’re going to pay your credit card off in full every month and then found yourself staring down a bill that’s larger than you expected? Or do you just want more ideas for how to keep impulse purchases in check? 

If any of these apply to you, the cash envelope budgeting system might be worth a try. 

pink envelope

What Is the Cash Envelope System?

The core principle of cash envelopes is that you decide how much you’re going to spend on a given category in advance rather than tracking your spending retroactively. Generally, you’d only use the cash envelope system for more flexible spending categories, such as gas, groceries, or clothing. Although some bills, such as water or electricity, might vary from month to month, they’re still relatively fixed. You’re unlikely to be tempted to make impulse purchases. Besides, most companies won’t allow you to pay your bills in cash. 

In order to decide how much to allot for each category, you can look over bank or credit card statements from the last few months to see how much you tend to spend on various things. Of course, you should make sure that the total from all categories is less than your take-home pay. If you’re overspending, try to cut back a little bit here and there rather than dramatically changing your spending patterns all at once, since doing so can set you up to fail and abandon your new system. 

Then, label envelopes according to your budget categories. Withdraw cash and fill each envelope with the amount you budgeted. When an envelope is empty, that money is gone. You can’t spend more in that category until your next paycheck comes in.

You should also decide what to do with money left over in your envelopes at the end of the month. Will you roll that over to next month’s spending? Or will you take that money and put it towards a long-term goal like savings or debt repayment?

Pros and Cons

The cash envelope system has many supporters, perhaps the most prominent of whom is financial guru Dave Ramsey. Its proponents point to studies that show people experience more distress at spending money—and therefore spend less—when they have to hand over cash compared to when they swipe a card. 

The primary benefit of the cash envelope system is saving money by cutting back on impulse purchases. There can be secondary benefits, such as saving on overdraft fees or cutting back on credit card interest.

One downside of using the cash envelope system is that it adds extra steps to your budgeting process. You will need to go to the bank or stop by an ATM in order to get cash out. Depending on what mix of bills you need, you might need to have a teller make change for you rather than just getting a stack of twenties from the ATM. If you usually budget via apps that track your bank or credit card transactions, you will have to adjust to keeping track of cash purchases. It can also be annoying if you need to use multiple cash envelopes to cover a single transaction—for example, you go to Walmart and buy groceries and socks and kitty litter. 

Another major downside is of course the risk of theft or loss. If your credit card is stolen, there are steps you can take to have fraudulent transactions reversed. If someone steals one of your cash envelopes, you don’t have the same recourse. The same problem applies if you simply misplace the money. 

How to Use Cash Envelopes

You can start using cash envelopes using just a package of basic white envelopes and a pen. However, there are also a multitude of purpose-made envelope systems available for purchase. These envelope systems often have extra features to make them easier to use. For example, envelopes might be color-coded so it’s easier to grab the one you need. Some have a ledger printed on them so you can keep track of individual purchases. If you worry about the durability of paper envelopes, you can even get plastic pouches or custom billfolds with tabs for your spending categories. 

It’s important to find a system that works for you. If you’re going to get sick of juggling half a dozen identical white envelopes, that won’t help you manage your spending. However, you shouldn’t get too caught up in aesthetics and spend a bunch of money on a beautiful custom setup that you won’t use. 

Virtual Envelope Systems

Perhaps ironically, there are also apps out there that allow you to sort your money into virtual envelopes. These could be a good fit for you if the idea of cash envelopes appeals to you but you simply can’t keep track of all the pieces of paper involved. However, it might not have the same benefits of physical envelopes. If you can add more money with the press of a button, you don’t have to see actual bills change hands every time you make a purchase. 

Put Your Money in the Hands of a Professional 

Virtually everyone eventually needs help managing their money, no matter what system they use on a day to day basis. If you need help making a budget that works for you or have finally got some extra money and don’t know what to do with it, contact us! We’ll connect you with an advisor who can give next steps tailored to your needs.

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