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Brown envelope with a fan of money sticking out of the top.

I know why you are here. You keep hearing about this “cash envelope system” and finally your curiosity got the best of you. Let me guess? You decided you were finished letting your money stress you out.  And, you have decided to take back control of your finances and make some major changes…am I on the right track?

This is great news and I’m so excited for you. 

Finally learning how to live on a budget and ditch the credit cards for cash helped us pay off $54,500 in only 20 months so we are proof that the cash envelope system works!

How Does the Cash Envelope System Work?

If you’re not familiar with the cash envelope system, then you’re in the right place because we are going to cover it all…consider this your complete guide to the cash envelope system!

The first thing is that it has a lot of variations. 

You might hear this referred to as the “cash envelope system” an “all cash system” or even “cash clip system” but the basics are pretty similar:

You budget a certain amount for each category ie: food, car maintenance, pet supplies, etc. 

Next, you withdraw that amount of money each month and you keep it in an envelope.  

This is all you spend (on said category) for the month….when it’s gone, it’s gone!

This helps you stick to your budget by teaching you to be more disciplined and not swipe that card every time you “need” something extra. 

When you spend all the money in your envelope you must wait until it is time to refill it in order to spend more money in that category…pretty simple.

Money and brightly colored envelopes with text that reads: The very best budget tool

How to Set Up Your Cash Envelopes

First things first: get yourself some envelopes!  

We currently use a combination of basic plain envelopes and the ones from the Financial Peace University Kit.

They are my favorite since they have a register printed on all sides, which allows me to keep track of what I spend almost like a checkbook.

Next, take a look at your budget and see which categories you would need to spend throughout the month.

For example, you will likely be paying your housing expense from your bank account instead of cash, so you wouldn’t need an envelope for that.

We have envelopes for the following categories just to give you an idea, but they will likely be different for you…

FOOD – Grocery shopping and any extras we need to pick up for our meal plan

TOILETRIES – We keep this for only normal toiletry items we need, paper products we keep separate

ENTERTAINMENT – Anything we want to do with the kids or for date night

MISCELLANEOUS – Inevitably, extra expenses will come up, we use miscellaneous for those

PET SUPPLIES – Food, litter, treats, etc. for our fur kids.  (We have a sinking fund for vet trips)

EATING OUT – Restaurants are rare for us but we do grab a pizza or Chipotle 2-3 times a month.

CHARITY – Aside from tithing, this category allows us to be charitable in other ways

GIFTS – This is a big expense for us, budgeting has helped immensely in this category.

SAMS CLUB – We buy all of our paper products here ie: TP, paper towels, napkins etc. with our Sam’s membership.

Determine what your own categories will be and label an envelope for each category and you’re all set up.

READ MORE:  The most effective systems for getting out of debt

How to Use the Cash Envelopes

You need to determine how you’re going to fill the envelopes.  We fill them each time my husband is paid, which is bi-weekly.  I take our full budgeted amount for the month and split it in half. I add up the halved amounts for each category, and that’s what I withdraw from the bank every two weeks.

Now stuff your envelopes.

If you’re using the printed envelopes from the Financial Peace University Kit then be sure to add your “deposit” amount on your register.

I find this extra helpful because when I’m in a hurry I can simply look on the outside of the envelope and see the “balance”.

When I make a purchase with the money in that envelope I mark down the amount and deduct it on the outside of the envelope, just like a checkbook.

Some people keep their envelopes at home and some carry them around, that’s a personal choice depending on what is more convenient for you.

You can also use a cash envelope wallet to make it easier to keep your envelopes organized!  

There is one included in the Financial Peace University Kit as I mentioned, but I had upgraded to this one.

If you don’t want to use an actual wallet you can always just grab some envelopes and toss them in the wallet you already use. 

This works great if you keep them at home and just take what you need. 

These are super durable and also include a register on them. I just found this awesome cash envelope wallet, and I’m in love.

I’ve read the reviews and actually, everyone that buys it seems to be in love with it, so I’m going to save up and customize my own. It’s perfect because it’s not as bulky and will free up some room in my bag.

New to budgeting? My 5-day Begin to Budget Mini-Course will walk you through the entire process…and it’s free. GET STARTED NOW.

How Does This Help You Stick to Your Budget?

There is a very distinct difference between making purchases with a credit card and making purchases with cash.

This was an eye-opening part of Financial Peace University for us.  You don’t necessarily feel it when you spend with plastic.

Obviously, you know you are spending money but you don’t feel the impact it has on your bank account. We get so used to “swiping” all day long.  

You don’t really feel the damage until you see your statement.  Then you’re left wondering how in the world those “couple of small purchases” added up so fast?!?!

READ MORE: How to quickly save a starter emergency fund

When you use the cash envelope system you are feeling each purchase.  And actually, it kind of sucks…

You will be surprised how much more you contemplate each purchase you are about to make instead of swiping your life away.

When using cash, you have an emotional reaction to handing over your money.  It makes you think about whether you really want to spend that money.

Is it worth handing over all your hard-earned cash? Giving your money away hurts! And believe me, it’s made me put many items back on the shelf.

Bright pink envelope with hundred dollar bills sticking out of it and text that reads: Everything you need to know about cash envelopes.

How Long Do I Have To Use the Cash Envelope System?

This is completely up to you.  We are currently still using this since we are not yet debt-free.  It works really well for us, but I admit, it can be a bit of a pain sometimes.

We have taken some breaks, but each time I eventually see the ripple effect it has on our spending so we always come back…

If you are not currently in debt or are not up for using the cash envelope system as laid out above, consider a modified version.

The same concept, but you can consolidate your categories. Perhaps you even just add them all together and label it “SPEND.”

I would suggest keeping food separate; however, with grocery being one of the largest categories for most families, it’s easy to go over. I encourage you to give this system a try, especially if you’re finding it difficult to adhere to your monthly budget.

I think you will find it extremely helpful.

Kristin Stones is the owner of Cents + Purpose, an online community dedicated to sharing practical personal finance content. Her mission is to equip women with the necessary tools and knowledge to take back control of their money and live a more purposeful life. She creates actionable content to help her audience achieve financial wellness using her simple approach to managing money - all learned through her personal experience of paying off almost $55,000 of debt in under two years.

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