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The Cash Envelope System

Welcome to The Penny Hoarder’s monthly Money Challenge, helping you find simple ways to improve your finances.

This month, we’re going to help you reset how – and how much – you spend by going back to cash. Known as the Cash Envelope System, you’ll rely on pre-labeled envelopes full of real, physical money for your day-to-day spending. Once an envelope is empty, well, that’s it. You’ll have to wait until your next pay period to replenish it. This not only helps you stick to a budget, it also makes you mindful of what you’re spending your hard earned cash on.

How it Works

Determine How You’ll Allocate Your Money

The first thing you need to do is create a budget. To get a good idea of how to allocate your funds for the spending categories you’ll be setting up, look at your bank and credit card statements from the past few months and analyze how you’ve been spending.

You may want to adopt a budgeting strategy, like the 50/20/30 Method, to help you determine how much you’d like to spend aside from your fixed expenses like rent, utilities and other bills.

Label Each Envelope

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

Tip: Have one envelope for miscellaneous expenses to cover unforeseen things that come up but don’t warrant dipping into your emergency fund.

Distribute the Cash and Spend Accordingly

On payday, visit your bank or an ATM and take out cash to fill your envelopes. Say you want to budget $500 per month for groceries and $100 per month 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.

After you separate the cash into its appropriate envelopes, you’re free to spend… but wisely, of course. Once an envelope is empty, don’t cheat and reach for your credit or debit card. You’ll have to wait until it’s time to fill the envelope again!

Have you tried the Cash Envelope Method? We know it’s already been adopted by several community members. So, if you’re continually running low on funds, it may work for you as well!

Last edited by Will S.
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Years ago I tried this system, it got old fast when I found myself borrowing from 1 envelope to another and had a hard time catching up. Then what to do with any leftover money. It seemed very labor intensive and I lost interest in doing budgeting this way, it became tedious and time consuming to write transactions down. This is literally a cash flow system and it may work well for some people. You also have to keep track of where the envelopes are and hope no one can have access to them.

I've used it before for groceries and now after several years, I'm back to using it. It does help in areas where you have flexibility (such as groceries). Shopping loss leaders, sales, coupons and such can keep you under budget and you can use the leftover cash how you see fit. I use a calculator to keep on track as I go through the stores.

I've been using it for one month and saved enough money to pay cash for 5 quarts of oil and a filter. It's time for a home oil change. 🙂

@dboothe - Thank you! 😀 I've found taking a calculator with me and adding up my items provides a good estimate of my total to keep from passing my budget. I also log all my grocery store totals on a recycled envelop and put my receipts inside. This does two things for me. 1) I have another visual of my spending as I go & 2) I have the receipts readily available for recording at home and for referring pricing.

I have also delayed some purchases a few weeks if I've had too many items on my list and not enough budget. There is a special face lotion I buy to avoid chemical burn and I consider this part of my groceries as I buy it at the grocery store. I stretched my old bottle three more weeks before purchasing a replacement which helped.

And if my budget allows the extra room, I will pick up an item or two for my pantry/freezer & then I don't have to buy it with next weeks budget.

Good luck!

I want to love cash envelopes, and I know it works with saving more and spending less. But I travel a lot for work, so I don’t feel comfortable carrying a ton of cash on me. I even tried to only bring an envelope or two and leave the rest home, yet it’s one more thought to remember where they are. I also don’t want to sit in my car calculating money.

I manage my budget on a paper monthly calendar. I check my personal and business accounts online almost daily. It could be better, but it works.

I have been doing this for the past several years. I LOVE it. Its a concrete way for me to maintain control of spending- groceries, eating out, hair/nails/etc, Costco.

I also keep cash 'sinking fund' envelopes for kids clothes/school supplies, fun dates, and a weekend with my girl friends; gifts for holidays and birthdays, and vacation.

I am MUCH less likely to go over budget when I spend cash. Every dollar I remove from that envelope reminds me of how much I have left, and when it's gone, its gone.

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