Why Envelopes Are a Great Weapon When You’re Fighting the Urge to Overspend

A woman's hand puts cash in an envelope.

In need of a serious money reset? Going back to cash could be the cure for your ailing budget.

Popularized by modern personal finance patriarch Dave Ramsey, the cash envelope system encourages you to toss aside your wallet and rely on pre-labeled envelopes full of real, physical money.

You don’t have to use this method for your fixed expenses, like your rent or monthly car payment. Instead, you’ll use cash for areas where amounts can vary: gas, groceries, weekend adventures or clothing, for example. Swapping cash for plastic can help you save money in the long run. 

Ready to try it?

How the Cash Envelope System Works

First, you need to create a budget to determine how much money you have to spend each month.

Whichever budgeting style you choose, make sure you have a good idea of what you can afford to spend in each of the categories you’ll track with the cash envelope method.

Then, grab a stack of envelopes. Label each one with a spending category, like takeout meals, groceries, movie nights, manicures or yoga classes. Your envelopes will vary depending on what you’ve included in your budget.

Each time you get paid, visit the bank or ATM and take out cash to fill your envelopes.

Say next month you want to budget $500 for groceries and $100 for gas. If you get paid once per month, you’ll take out $600 on payday. If you get paid twice per month, you’ll take out $300 each time.

Separate the cash into its appropriate envelopes. Then spend wisely. When your envelope is empty, you can’t cheat and reach for your credit or debit card. You’ll have to wait until it’s time to fill the envelope again!  

Pros and Cons of the Envelope Budget System

Let’s start with the advantages, because they’re pretty big.

Swiping a card to pay for something is easy. Paying with cash forces you to look at the money, touch the money, and consider what you’re paying in exchange for a product or service. Don’t be surprised if relying on the envelope system makes you start thinking twice about some of the purchases you’d normally make.

Another benefit of working from cash envelopes is that it’s impossible to incur an overdraft fee or have your debit card declined. When you’re out of cash, it’s not fun, but at least you’re not in the red.

It can help you resist the urge to shop online, too. But if you do decide to make a purchase on the web, take the same amount of cash from the assigned envelope and deposit it back into your bank account to cover the purchase. (Really, there’s no cheating in this system. There’s no place to hide.)

What about the disadvantages of this system?

Well, there aren’t any rewards beyond the satisfaction of paying with cash to shore up your budget. If you like getting credit card rewards, the envelope system won’t help you earn a free flight.

It can also be challenging to pay with cash in tech-friendly retail environments. Some stores and eateries are going cash-free to speed up the payment process and avoid counterfeit bills. If you’re planning to visit a new-to-you shop or restaurant, you may want to check their payment options.

If you’re managing a budget for more than one person, figuring out who gets how much money in their envelope can be challenging. Talk through your goals for using the envelope method before starting, and discuss ways to distribute cash appropriately.

3 Expert-Level Tips for Cash Envelope System Fans

You don’t need to get fancy to be successful with the cash envelope system, but if you’re ready to take it even further, try some of these advanced tips.

Track each purchase from each envelope. Just jot it down on the envelope while you’re waiting for your groceries to get bagged up. Or stash paper receipts in your envelope, and write your expenses down at the end of each day. This extra step will help you be even more mindful about what each dollar you spend is going toward.

Splurge on special envelopes. Can’t keep track of your cash stash? Get a pack of heavy-duty color-coded envelopes to manage your cash budget. Some options even have lines for neatly tracking those expenses as you go. If you travel with several envelopes at a time, you may want an expandable bill folder. Dave Ramsey even has his own line of envelope system wallets and trackers.

Strive to have money left over at the end of each month. This may prove the toughest challenge of the envelope method. If you can get through the month without encountering an empty envelope, roll any extra cash into the next month. Either enjoy a bigger budget, or take out less cash and put the surplus into a savings account — budgeter’s choice!

Lisa Rowan is a senior writer at The Penny Hoarder.

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