Today I will discussing how to use the cash envelope system, another tip by financial guru Dave Ramsey.

The cash envelope system can be a game changer for anyone struggling with money.

It is the best way to only spend what you can actually afford. In cash!

For many people, they can’t imagine ever spending money any other way than using the cash envelope system.

While it is a game changer, you must learn how to use the cash envelope system correctly. If not, you are in the same game as before. It won’t be able to work properly and you won’t see the greatest benefits of using cash.

Moving over to a cash envelope system is the simplest tool to start budgeting. Over time, it will help you to stop living payday to payday and start saving more money.

The cash envelope system is a great way to jump into budgeting for the first time. You get to see how and where you are physically spending your money. Online transactions are harder to track and more difficult to feel the pain of spending money.

Let’s learn how to start using the cash envelope system properly.



How to use the cash envelope system

What is the cash envelope system?

The cash envelope system is a way to visualise and maintain your budget. In your budget, you will have categories of spending. Some or all of those categories will have an envelope.

Whether you decide to move to a complete cash system or a mixture of cash and digital is up to you.


Inside the envelope, you will place the cash you need (that you have previously budgeted) for each category.

During the month you will use those envelopes of cash to pay for items from each category.

The idea is to use the cash to help you stay on budget in each category and not to overspend. Allowing you to free up money to save more or even pay down debt!


How does the cash envelope system work?

Before you develop an opinion on cash envelopes, it’s important to know exactly how cash envelopes work!

Basically, instead of using your debit card for certain purchases, you choose to use cash instead.

This means that you have to intentionally decide how much money you want to spend in certain categories of your budget.

Then, head to the bank and withdraw cash from your checking account for those categories.

Seems like too much work? I promise it’s not! Plus, cash envelopes help people develop positive habits such as living within their means!

It’s a great way to help you stick to your budget and not swipe the debit card too many times!


How the cash envelope method can help you control your spending

Studies have shown that most people spend less when they use cash. The physical act of putting the dollars/pounds in someone’s hand and seeing them go is more painful than swiping a card, and the physical ability to see when the cash is gone and you have no money to spend will prevent you from overspending.

Swiping plastic can be so easy and can lead to massive overspending! Cash envelopes force you to think twice before spending.


If you run out of money in your cash envelope, you cannot spend any more money.

This method won’t work if you just pull out your card when the cash in your envelope is gone. You must practice discipline so that if the cash is gone, you do not spend.

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Create a budget

The cash envelope system won’t work if you don’t have a budget created. To be successful with cash envelopes, you have a lot of work that needs to be done before you begin the process of switching from debit to cash for your budget.

If you haven’t already, you need to create a successful budget. That’s the first step. I’m not going to lie, the hard part of the cash envelope system is not using the system itself, but developing and perfecting a budget that allows you to use envelopes in the first place.

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Withdrawing your cash and set it aside

After every payday, you can get your money and put your budgeted amount of cash inside each of the envelopes. It is important that you do this right away so that you don’t forget and use the money for something else.

The sooner you can set aside your budget, the better. If you get paid once a month, you will be getting all of the money and putting it in the designated cash envelopes.


If you are paid twice a month, you will divide your total amount needed per month by two and this will be the amount you will withdraw or get from your payday every time.


Cash envelope categories ideas

I don’t recommend pulling cash out to pay your rent or electricity bill. Those are both expenses where you aren’t likely to overspend each month.

Instead, pull cash out for areas in your budget where you tend to spend too much money.

Not sure where you are spending too much money? That’s okay! I recommend printing off your bank statements from last month. Go through each transaction and categorize it.

Highlight all the transactions where you went out to eat in one colour. Then use a different colour highlighter for all the times you ran to the grocery store.

Once you’ve categorised your transactions, add up how much you’re spending in each area. If you’re spending more than you had budgeted, then chances are you need a cash envelope for that category!

Below are common cash envelope categories:

  • Food: Groceries
  • Food: Eating out
  • Haircuts
  • Fun Money
  • Entertainment
  • Clothing
  • Car Maintenance
  • Home Repairs
  • Christmas

Ultimately, find what works for you when it comes to using cash envelopes.


Track your expenses

The beauty of this cash-only system is that it helps you eliminate overspending. When the money is gone, it’s gone.

With that being said, that doesn’t mean there isn’t room for improvement in your budget. When you look back over your month and wonder, where did my money go? You can look back and see exactly where your money went!

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Stick to a budget

If you run out of cash in any one category and your envelope is empty, that means you can’t spend any more money from that envelope.

When first starting out you can borrow from other envelopes, but be aware that this is a signal that you may need to adjust your budget or your spending.

Be sure to record any money you took out of another envelope and record the new amounts.

But you want to avoid having to borrow from any other envelopes too often and adjust your budget and spending as needed during your next budget review.


Allocate leftover cash

If you have cash left over at the end of the week or month then you are doing great!

Any leftover cash should be allocated towards debt first and then towards savings. If you haven’t already built up an emergency fund then put any extra cash towards your first $/£1000 emergency fund then start tackling your debt.

If you find you always have extra in certain categories, then reallocate that money to any categories you may be going over in, or start directing it at paying off your debt, or building your savings and reduce that category amount for the future

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Do I Have to use cash for everything?

No, you don’t have to use cash for everything. Overall, there’s not a huge benefit to paying your monthly bills with cash. Paying large payments with cash can become cumbersome and I really don’t see a bonus to doing it this way.

I’ll cover this in further detail in a bit. But my personal choice for paying monthly bills is to use online bill pay and use the cash envelope system for day-to-day purchases.


Why cash envelopes work so well

This system works so well because it’s simple and tangible. When you’re purchasing everything with credit it becomes so easy to swipe your card without even thinking about the money you’re spending.

When using cash only you are physically dealing with the money which somehow changes your money mindset.


Pros of cash envelopes

  • Fewer transactions to reconcile when you balance your budget (for example – one cash withdrawal instead of 20 little fast-food purchases)
  • Easily see you have no more money to spend
  • Forces you to be organised
  • Deters impulsive overspending from online and card purchases
  • Total awareness of your budget and spending


Cons of cash envelopes

  • You can lose cash
  • Can be impractical if you do a lot of online shopping
  • Requires organisation to get cash out in a timely manner
  • Requires you to go to bank and withdraw cash every time you get paid


How to use the cash envelope system – Final thought

The cash envelope system is designed to teach you discipline in your spending and to help you overcome your habit of overspending.

It may be hard at first to carry around all that cash and not use your debit card anymore, you may even get some funny looks for whipping out an envelope with cash. But who cares?

This is for you and only you, a way to help you control your finances and be more intentional with your spending.

Have you tried the cash envelope system? Did it work for you?

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