Pros and Cons of the Cash Envelope System


So, you've been trying to put together a monthly budget using various websites, apps, or even spreadsheets. You've also probably been trying to be diligent in tracking every expense and all your income too. Yet, month after month - you get ‘less-than-ideal’ results - Where is all the money going?! Why’s this credit card bill so big?! Seriously?! If you’re anything like me… you’re asking What did I even buy?

The good news is… if you’ve already created a budget, you’ve already taken the most difficult step! The real problem you're facing is that, although you make a plan, you’re having some trouble sticking to it.

If you blow through your budget and then ‘fall back’ onto the credit card just to make it to your next paycheck, then you should consider rethinking “the system” or “method” of how you spend money each month.

The real question is… “How can you make your budget actually work for your lifestyle and spending habits?” Ultimately, is there a system you can use that will keep you from reaching for the credit card and help keep you from going further into debt? The good news is… there is such a system.


The cash envelope system is a very hands-on approach to budgeting. You use actual cash to fund your purchases. The rules are pretty straight forward – you can spend the money until it’s gone. Once it’s gone… it’s gone. No buying stuff with other people's money (credit cards).  If you can agree to this fundamental law, then the cash envelope system can work for you.


STEP 1: Create a balanced budget

Easier said than done, right? If you need help creating a budget, head over to our article on creating your first budget. Once you have a budget that properly accounts for all of your expenses and sources of income, you’ll be ready for the next step. If you are having trouble knowing how much you spend on different categories, then you’ll have a little homework to do. Dig thru the last few months of credit card and bank statements to see if you can get a better idea of a reasonable budget for those categories.

STEP 2: Create your spending Categories

Cash envelopes can work for every category in your budget, but frankly, they work best for discretionary categories. Discretionary categories are the places in your budget that you have some immediate choice over how and when the money is spent. Some great examples are:
  • Coffee

  • Nails & Hair

  • Clothing

  • Groceries

  • Gas

  • Gifts

  • Entertainment

  • Dining Out

  • “Fun Money” / Pocket Money / Petty Cash

Once you have identified your spending categories, write the category name and dollar amount budget for those items on the outside of your envelopes. (Note: For some categories, it might make sense to not use the cash envelopes; There is nothing wrong with sticking to a traditional checking account for things like rent, your mortgage, and other fixed expenses.  This is actually referred to as the "Hybrid Method", which is a pretty common way to budget)


Without sounding too repetitive, in order to really make this system work, you have to use cash for the categories that you have selected to use the cash envelope method. If you run out of money in your envelope, then you have to stop spending in that category.


Making a perfect budget – especially if you are new to this whole thing – can be a near-impossible task. It’s ok to take a step back a couple of times during the month to re-evaluate your spending. If it looks like you have way too much money left in one envelope (like your morning coffee envelope) and are just barely scraping by on your grocery budget, then it might be time for a “Pivot”. Simply take the cash form one envelope and move it over to the other envelope – it’s that easy.


As you near the end of your first month with the cash envelopes, you’ll want to decide what to do with the leftover money in some of your envelopes. You could simply take all of the money and use it to pay down debt or add to your savings account. Although, some categories might make sense to ‘rollover’ the money – especially if you are saving up for a larger purchase.


For Starters, it just works!

The cash budgeting method is a tried-and-true system. It simply works because you can only spend cash if you physically have. Any spending method that allows you to spend money you don’t have (credit cards, and even over-drafted debit cards) can put you at a severe vulnerability to overspending. With the cash method, you simply can’t overspend, and that’s the reason it’s been around for such a long time.

It Builds Discipline:

You are the biggest ally or the biggest enemy to your own budget. Your spending habits are what ultimately allow you to have a successful (or failure) with your budget. Adhering to a cash budgeting system allows you to build that discipline into your life so you can see the fruits of making a spending plan and sticking to it. 

Your budget becomes more than just a good Idea:

When you spend money with a plastic card – weather at a store or online – it’s a pretty seamless process. Which is great when you want your stuff fast, but not great if you are trying to exercise a little control over your spending habits. Having physical money lets you experience the act of purchasing… you can see your money being spent, and you can physically touch it, and feel just how much you have left. If every purchase hurts just a tiny bit, then you’re doing it right. Your budget becomes way more than just some numbers on a spreadsheet!

No Bank Fees:

Bank fees are the worst! I don’t know about you, but having to pay someone else for the privilege of being able to use my own money seems like a fee - exactly the kind of fee that I’d like to avoid. Putting away your debit card, and relying on cash will bring you the peace of mind to know that you won’t be on the hook for overdraft fees – The average person incurs two overdrafts per year and some banks charge as much as $40 for an overdraft fee – no thank you!

Encourages Thoughtful Spending:

When you see the money start to be removed from the envelopes, there’s a change that begins to take place in your thinking process. You start to realize that you are choosing to spend money on one category, and not spend it on another category.  That's the moment you realize that your budget is just a list of the most important things that you spend money on.   The most important items are at the top of the list.  All that you are doing is making sure that your dollars are directed towards the things you actually value most.

It’s The Least Evil Budgeting System:

If you want to go absolutely bare-bones on the amount of effort to get your finances under control, then a cash envelope system is it. Simply decide how much money to put in each envelope. If “something comes up” during the month, you 'steal' from one envelope to cover your needs in another. No tracking of spending, no collecting of receipts, no reconciliation of bank statements. Nothing.

You Shouldn’t Miss Payments:

Because you are spending cash, you are withdrawing it from your bank account before you actually spend it. Therefore, the balance in your bank account will be a true reflection of the money you have remaining in your account. This will help you to make sure you have the money in your account to cover the big payments that roll around each month (Like rent, car payments, and other predictable expenses). Fewer surprises in your main checking account will help keep you on track and actually make you feel less stress about your account balance.


Some People don’t like the Idea:

To some people, the idea of carrying around cash seems like an inconvenience that they'd rather not deal with. They like how easy it is to swipe the plastic, don't really feel safe carrying around too much cash. It really is hard to argue with that convenience, and using cash envelopes will certainly take a shift in your mindset.  Being able to mentally get 'onboard' might be one of the biggest challenges you face with using the cash envelope method, and it simply might not be for you.

You Have to physically get the Cash:

Whether you head over to the bank to withdraw it, or simply stop by the ATM… you’ll still have to take the time and effort to withdrawal the money. Some ATM’s charge fees – that’s no different than any other bank fee – so please avoid those like the plague.

Some ATM’s will have daily withdrawal limits of around $500 to $1000 so you might have to even make a few trips during the month – in which case, it’s probably easier to just head over to your local bank. If you are OK with the little bit of extra effort of grabbing the cash each month, then it shouldn’t be too large of an inconvenience to deal with each month.

You Won’t be Racking up Cash Back Rewards:

People love their cashback and bonus rewards from their credit cards.  They simply love them!  This is probably the biggest objection we hear, and it’s because cashback rewards programs and travel points are one of the most attractive features of credit cards. Of course, they are like free money for doing something that you would have done anyway, right?  But be careful with credit cards, as they are also one of the quickest ways to blow your budget too!

When you do the math, you realize that the average household with credit card debt pays almost $1300 a year in interest alone! Most households enjoy way less than that each year from their rewards program. So, for most households, the math simply doesn’t support that argument of continuing to use credit cards "for the points". Once you factor in the total cost of credit card ownership… including late fees, membership fees, and cash advance fees, you’ll quickly realize that no matter what rewards program they are offering you, it’s not as rewarding as the “I paid cash for that and won't have to be pay interest on it for the next 12 years” program that the cash envelope system is offering you.


In this day and age of smartphones, credit cards, and electronic payments, it might seem a little strange to be caring around envelopes with cash. But you know what? It actually works. Thousands of consumers are waking up to that fact every month as well.  Sure, you might not be on the cutting edge of technology, but as long as you can stick to the system and keep the credit card tucked away, it will work for you too.  My budget is proof of it each month!

If you have had success with the envelope system, I’d love to hear about it in the comments below.

Older Post Newer Post

Leave a comment

Please note, comments must be approved before they are published