A complete guide explaining how and why you should use the cash envelope system.

If you’ve been researching different ways to budget your money, then you’ve probably heard of the cash envelope method. 

It’s a popular system because it offers an easier way to track your spending which is one of the biggest budget challenges that many people struggle with. 

The premise of the system is to stick to the amount of money you determined for each of your budget categories using cash to make you aware of where your money is going

The cash envelope system has been around for decades and has been popularized by Dave Ramsey’s Baby Steps.

If you are reading this, then you probably are wondering exactly how does the cash envelope system work so let’s dive in….

budget envelopes


How does the cash envelope system work?

Using the cash envelope system is pretty straight forward, even if you are new to budgeting. Just follow the four steps below and you’ll be golden.


1. Set up your budget categories


The first thing you’ll want to do is brainstorm a handful of budget categories that you’ll want to track. 

Unlike a traditional budget, you’ll want to keep your budget categories to a minimum, 5 – 10 categories work best to keep your envelopes more manageable.

This will make things easier and minimize the number of cash envelopes you’ll need to manage by grouping like expenses together. 

For example, you might want one envelope for your fixed monthly expenses. This category is pretty straight forward since these are “fixed” bills and you generally pay the same amount from month to month. 

You’ll also want to create a cash envelope for discretionary spending as well since this is one of the biggest budget busters for most people.

Below is a short-list of popular categories to give you an idea of how to set up your envelopes. You by no means have to stick with these if you don’t want to. 

Do whatever works best for you and your situation to make things easier on yourself.

Cash Envelope Category Examples:

Fixed Monthly Expenses

Discretionary Expenses

Groceries & Household Expenses




Gift Giving



2. Determine a monthly amount for each budget category


Step 2 is to determine the monthly amounts to a lot to each of the cash envelope categories that you determined in step 1. 

But before you do this, you’ll first need to know your total monthly income to make sure you don’t spend more money than you are bringing into the household.

Then you’ll want to make sure all your fixed expenses such as your mortgage, car payments, utilities, etc. are taken care of.

After you complete the first two steps, you can then divide the remaining cash into your categories.

It’s important to note here that this probably won’t be the amounts you add to your money envelopes unless of course, you are paid on a monthly basis.

Since most people get paid on a weekly or bi-weekly basis, you’ll need to determine how much to add to your envelopes based on how often you are paid.

So if you are paid weekly, you’ll need to divide the monthly amount by 4. This will be your weekly contribution to each specific category. If you are paid bi-weekly, you’d divide the monthly amount by 2.

Then when payday rolls around, you simply cash your paycheck and divide your money and fill your envelopes with the predetermined amounts.


3. Spend only what’s in your budget envelopes


Now that you have your cash envelope system set up, what you are going to do is use the cash within your envelopes to pay for your expenses and purchases.

It does take some getting used to and you’ll need to be mindful of which envelope you need to grab money out of when in checkout lines. 

Last, but most importantly, you are only able to spend the allotted money within your envelopes. 

So when the money’s gone, it’s gone and you’ll have to wait to make a purchase until you replenish your envelopes.

You may be templated to grab a few bucks from another envelope to get by until your next payday. 

This would defeat the purpose of using this cash-only budgeting method since one of it’s biggest benefits is to make you aware of where your money is going and to stick to the amount you originally budgeted in each category. 


4. Tracking your money using the envelope methods


Another big benefit of using the cash envelope system is that there is no need to track how much you are sending in each category every month since you are allotting a specific amount. 

But with that said, you’ll probably want to keep an eye on how much money you have remaining until payday to avoid a sticky situation. 

Luckily, most cash envelope templates have an expense log right on the envelopes which makes it really easy to track how much money you have remaining in your envelopes.

If you are just using plain envelopes you can just jot down the starting balance on the front of the envelope and then jot down the amounts every time you withdraw cash from your envelope to keep track of how much cash you have.

 You can find many cash envelope templates like the ones below on Amazon to get you started

Cash Envelope Templates by Clever Fox

Advantages of using the cash envelope system

Helps you manage your money better 

When you see your money going in and out of the envelopes you are more aware of how spending on certain items drain your money. 

This in turn helps you manage your money better so you don’t have to live paycheck to paycheck.

It teaches discipline

As you see the money flowing out, you become more disciplined and are much more likely to live below your means

You can’t overspend

If you stick to the rules of the cash envelope system, then you will never spend more than you intend. This, of course, is the whole point of sticking to a budget.

No overdraft charges

Because you are buying things with cash instead of a debit card, there is no chance of incurring costly overdraft charges which we all know are pretty steep, usually between $20 – $35 each.

Disadvantages of using the cash envelope system

It takes getting used to

When you first start using this system, it does take a bit of getting used to, especially when you make purchases for items in different categories in one transaction. 

You’ll need to go to the bank every payday

Because you are using cash to budget, you’ll need to run to the bank to either withdraw your money or cash your paycheck once a week or however often you get paid.

You need to carry cash

Carrying cash can be a bit unnerving for a lot of people. What you can do is just carry enough cash you are going to need a day at a time to make it a bit safer if this is a concern.

You won’t earn rewards

Because you can’t use your credit cards, you may miss out on credit card rewards points or even purchase protection that some companies offer. 

Money envelopes

Commonly Asked Questions About The Cash Envelope System

What about bills that are paid by check or online?

This one trips lots of people up but there’s a super easy fix, you just work these bills into your envelope system as usual. 

But instead of withdrawing the money from the bank, you just keep it in your checking account and pay the bill as you normally would. 

Make sure you log these transactions so you know where your money went.

What if I run out of money?

The whole point of using the cash envelope method is to stick to the amounts you budgeted for each category so when the money’s gone, it’s gone. 

You can no longer spend money in that specific category and no borrowing from another envelope to get by either…

What do I do with leftover money?

If you have money left over at the end of the month, great! You can do a few things with the left-over money. 

My suggestion would be to build up an emergency fund to help alleviate financial pressure when unexpected expenses pop up. 

If you already have money set aside for emergencies, then you could roll the money over for the next month. 

You could also use it to save up for major purchases or you can even treat yourself for doing such a great job budgeting your money!

What if an unexpected expense pops up?

As I just mentioned, you should have an emergency fund to cover these expenses and if you don’t you’ll want to get that taken care of. 

But with that being said, if you don’t’ have one, you are going to need to take care of it with the cash you have on hand which means you won’t have that money to spend.

Can I use the cash envelope system with a debit card?

Funny enough, you can. What you’ll need to do instead of carrying cash envelopes is to keep a log of all money spent by category using an expense tracker or paper and pen. 

Because it can be so easy to lose track, you may want to use bank accounts as your envelopes, so one bank account for each budget category.

Quick Recap: How To Use The Cash Envelope System

1. Set up your budget categories, 5 – 10 is recommended

2. Determine the monthly amounts for each budget category

3. Spend only what’s in each envelope on each specific budget category

4.  Track your money as you spend it with an expense log

Cash Envelope System Conclusion

As you can see, using the cash envelope budget system is pretty easy and straightforward, but does take some getting used to.

If you are the type of person who hates tracking your budget or constantly overspends money from week to week, then you might want to give this method a try.

Don’t think the cash envelope system is the right fit? Here are a few other options for you.

Budgeting Made Easy

A customizable budget spreadsheet available in both Excel and Google Sheets.

Budget Spreadsheet for Excel or Google Sheets

Budget Planner

A complete printable budgeting system to help you manage your money better.

Printable Budget Planner



Your turn! What do you think of the cash envelope system? Have you tried it or are you going to?