3 Steps to Create a Cash Envelope Budget System

What if you were told you could save money by using cash instead of credit and debit cards? Until the relatively recent advent of plastic cards, most individuals used cash for their purchases. While modern consumers love the convenience, perks, and limited liability of cards, studies have shown that credit card users spend more money, especially since parting with cash is psychologically more “painful” than swiping a card. If you are having a hard time sticking to your budget when your finances are not in front of you, then sorting your budget allotments into tangible categories through the cash envelope budget system may be right for you.

Updated July 23, 2020

You may have already heard of this system but previously deemed it too “old-school” or difficult to maintain. However, we’d argue that this mindset, in which electronic tools streamline every facet of our decision-making process, is precisely what contributes to senseless overspending. The ease of doing something contributes to apathy, and this apathy leads to overspending. The extra work of the cash envelope system may help lift this financial apathy. So if you routinely rack up more revolving debt than you can comfortably pay off each month, you might want to take a second look at the money-saving opportunities associated with the cash envelope budget system, which, when implemented correctly, could help you save money and take control of your finances. Here are the three steps associated with creating a cash envelope budget system:

Audit Your Budgeting System

Whether or not your current budget is working for you, you need to take a look at it and figure out if it is conducive with the cash envelope system. The system operates on the zero-based budgeting concept — the idea that every penny you make should fall into a specific category — so if you already have this kind of budget system in place, you can move on to the next step. If not, you can find information about how to easily create a zero-based budget.

Make Envelopes for Each Category

Once you have your zero-based budget in place and you have divided your income into categories, it is time to make the envelopes. Grab a pack of envelopes and use one for each of your budgeting categories, such as groceries, gas, clothing, and entertainment. Write the category names on the back of the envelopes, withdraw the weekly or monthly (or whatever time frame you choose) cash allowance you have already calculated for each category, or simply ration out any remaining cash that falls within your budget.

One problem many people run into when trying to implement the cash envelope system is online bill payments. Different methods work for different people, and you can feel free to deviate from the structure of the system on this step. Some people decide to leave money in their checking account for their fixed expenses like rent, utilities, and student loan payments. Others find it helpful to create a separate checking account for these expenses. Of course, you are not going to end up with zero dollars in the bank when using this system — ideally, you will also be putting a designated percentage of your income into your savings account(s), retirement accounts, IRA accounts, investments, and any other long-term or emergency-only accounts.

Be Disciplined

Budgets can be hard to stick to at times, and they will always require hard work to maintain. The cash envelope system is no different, as it demands even more discipline to be successful. You need to be strict and committed for it to work. That means that if one of your envelopes is empty, it is empty, and your budget — as well as your spending for that timeframe and that category — is gone, without exception. Once you wrap your mind around this concept, you will find yourself cutting unnecessary costs. For example, if you have allocated $100 to spend on groceries for the week and end up with a $102 total at the register, you need to put back that magazine or that bag of chips. After some time, you will become more selective with the items you purchase, and you may end up finding coupons to make your budget stretch even more.

Reap the Rewards

Don’t get discouraged if the system is not working correctly in the first few months. Like anything else, perfecting a routine may take some time, and that is okay. However, if it works for you and your household, you could soon see the rewards of all your hard work. The cash envelope budget system is a great way to hold you accountable and let you see exactly how much money you have left to spend in certain categories, thereby keeping you from spending money on “extras” you might not really need. Give the system some time, and before long, you will likely see more money in the bank, have more wiggle room in your budget, and lessen your financial stresses.

If you’re looking for another opportunity to save money every month, it might be time to consider student loan refinancing, and there’s no way better to start than checking out the ELFI student loan refinancing calculator.*

*Subject to credit approval. Terms and conditions apply.