cash envelope system

What is the cash envelope system?

The cash envelope system is a popular budgeting method that involves putting cash into different envelopes based on your spending categories.

It can be a great way of budgeting for those who need a more visual representation and it can help to ensure you spend less money and stay on top of your budget.

Instead of handing your card over at the supermarket, you pull out your ‘grocery’ envelope and take the cash from there. Likewise, instead of handing your card over at the petrol station, you pull out your ‘fuel’ envelope and take the cash from there.

Once the money in an envelope has gone, you have to wait until it’s time to restuff the envelope with cash in order to spend in that category again.

So if you have a weekly grocery budget of £100, you would put £100 into your grocery envelope and that would be what you would use throughout the week when you shop for groceries. Once that £100 has been spent, you have to wait until the following week until you can spend more. You can’t take it from, say, your fun budget or your beauty budget. You can only spend the money out of the specific envelope relating to that budgeting category.

The general consensus is that the cash envelope system shouldn’t be used for household bills such as rent and mortgage, gas and electric, council tax, etc. It is far easier to pay these by monthly direct debit. Instead, the cash envelope system should be used to pay your variable bills, such as pet care, groceries, entertainment, beauty, etc.

How can it can transform your finances?

Let’s be honest here. Who hasn’t ever been tap-happy with their card? I know I have. When we use a debit or credit card, it’s very easy to lose sight of the fact that’s it’s actually money we’re spending. We’re not physically handing the money over to someone else. We’re just tapping our card, and it’s very easy to overspend.

With the cash envelope system, you can’t just tap and forget. You have to hand your actual money over, so you’re much more likely to be more mindful of what you spend on and how much you’re spending.

Also, as the week (or month) goes on, you will notice your money dwindling and will have no choice but to be careful with your spending otherwise you’ll run out of money.

How to use the cash envelope system

It’s very important to remember that the cash envelope system will be different for different people. It is a very personal thing and what works for you won’t necessarily work for someone else.

For example, you might spend a fair amount on groceries but not a lot on entertainment, whereas someone else might have a lot more in their entertainment envelope but not so much in their grocery envelope.

That’s the great thing about budgeting – there’s no right or wrong. It is personal to you and you have to keep it realistic because you’re the one that has to stick to it. There’s absolutely no point putting £50 in your grocery envelope for the week if you know that you usually spend closer to £100. You will be setting yourself up to fail.

1. Create your budget

The first step is to create your budget. In order to create a successful budget, you first need to track your expenses – all of your bills and all spending aside from your bills.

The easiest way to do this is to go through all of your bank statements and credit card statements from the last couple of months. List everything down. You’ll notice that this spending will fall into certain categories – utilities, groceries, fuel, entertainment and eating out, pets, etc. You will be looking at these closely in the next step.

You will also need to track any cash you spend when out and about, as this can be a big drain on your finances. You are much more likely to lose track of cash purchases over the course of the month. Either write down these purchases at the time or keep your receipts and jot them down later. You can write them down on a special expense tracker or just use pen and paper.

2. Create your spending categories

Once you’ve tracked your spending for at least a month, you can sort out your spending into categories.

Some common categories include:

  • Groceries
  • Fuel
  • Pet
  • Fun/entertainment
  • Eating out
  • Beauty
  • Clothes

You then need to see how much you have been spending in each of these categories. Is that level of spending affordable for you and your budget? Do you need to cut back at all? Take a look at your total income and deduct all of your expenses from that figure. Are you left with a positive figure or a minus?

If it’s a minus, you either need to decrease the amount of money you are spending. If this isn’t possible, you will need to increase your income in some way. Perhaps you could work some additional hours or maybe take on a side hustle? I did (and still do) both matched betting and online surveys to increase my income.

Once you’ve decided on realistic figures for your spending, you’re ready to stuff your envelopes with cash!

3. Envelope Stuffing

Once you’ve decided on your spending amounts for each spending category, it’s time to stuff your envelopes.

Get yourself an envelope for each of your spending categories and write the category name on the front of each envelope. Then add the correct amount of cash to each envelope.

You can stuff your envelopes each pay cycle or weekly or monthly. Find a timeframe that works for you and stick to it. Most people find that doing it every pay cycle works best for them.

4. Spend cash only

Once the money is in designated envelopes you need to ensure that you only spend money from the appropriate envelope. If you’re going grocery shopping, just take your grocery envelope with you to avoid spending from any of your other envelopes.

I would advise leaving any debit or credit cards at home. From now on, you are to spend cash only, and bringing a card out with you is just a temptation you don’t need.

Once you have spent all of the money in an envelope, you have met your budget for that pay period and will need to wait until your next envelope stuffing session. Do not try to spend from another envelope, as that will leave you short in that spending category.

5. Decide what to do with any left over money

You will sometimes find that you don’t always spend all of the money in your envelopes. You need to decide what to do with this money. If you are trying to pay down debt, you could use it for that purpose. Alternatively, you could use it to save for an emergency fund.

If you find that you consistently have money left in particular envelopes, you may want to reconsider your spending amounts. Maybe you need to reduce the allowance and then use that money elsewhere.

Where to find your cash envelopes

Thanks to Dave Ramsey, an American financial guru, the cash envelope system has grown in popularity over the years and there are now a wealth of options when it comes to choosing your cash envelopes.

I love these pretty, but practical envelopes, but plain white envelopes work just as well. If you want to get fancy, you could keep your envelopes in this gorgeous binder. It comes with everything you need to get started and you’ll have no problem keeping yourself organised.

Cons of the cash envelope system

The cash envelope system doesn’t come without its downfalls. While it works very well for some people, others just can’t get to grips with it for a few reasons.

1. You have to carry around large amounts of cash

As all of your variable spending is now in cash, you will need to carry a lot of cash with you. This can make a lot of people feel uneasy due to fear of losing it or having it stolen. If you are unfortunate enough to lose an envelope full of cash, that’s it gone forever. If you had simply lost your bank card, you would have a new one in a few days.

2. Frequent bank/ATM trips required

Most of us receive our wages through the bank and don’t usually have hundreds of pounds lying around the house. This means that frequent trips to the bank will be needed in order to withdraw the cash to stuff the envelopes with. Some people don’t have time to do this or don’t feel comfortable withdrawing large sums of money and walking home with it.

3. Sticking with categories can be problematic

Our spending isn’t always clear-cut. Many supermarkets now have homeware sections and we may grab a new frying pan or some teatowels along with our grocery shopping. Do we make two different payments from different envelopes, or do we take it all from the grocery envelope? Or what if we also need to grab some socks? Do we then need to make three different payments? This puts a lot of people off using the cash envelope system.

4. Juggling cash with your partenr/spouce

If you are trying to work the system with a partner, things can start to get really complicated. What if you both need petrol on the same day but you are in separate cars and in separate places? Who gets the fuel envelope? Does one pay with their card and then try to remember to withdraw that money to pop back into the correct envelope?

This can be a deal-breaker for a lot of people as it starts to become quite impracticable and unworkable. And what happens when things become too difficult and confusing? We tend to give up.

5. Miss out on cashback rewards

By using the cash envelope system, you are unable to benefit from the cashback rewards offered by a lot of credit card providers. However, if you have trouble sticking to a budget, credit cards probably aren’t a great idea anyway.

6. You lose out on the added protection that cards offer

If you buy something with your card, your purchase is protected to some extent. If you bought something and it’s faulty, your card provider can help to get you your money back. You lose this protection when you pay with cash.

7. Not every shop takes cash

More and more shops are becoming cashless, meaning that you won’t be able to shop there if you use this method.

8. You lose the convenience of online shopping

Sometimes, it’s just so much easier to order online. If you’re unwell but still need to do a grocery shop, you’ll be unable to order it online. You’ll either have to force yourself to go out and get the groceries yourself or you’ll have to entrust someone with your grocery envelope and ask them to go for you.

Final Thoughts

If you have previously struggled to stick to a budget and tend to overspend in many areas, the cash envelope system might work well for you. It is a very visual way of budgeting and you will be more conscious of what you’re spending. Whatsmore, once you’ve spent the money, you can’t spend more, as the cash is gone!

However, we are living in an increasingly digital world, it may feel quite outdated to use cash for all of your spending. Many people have also found the cash envelop method to be confusing and not very practical. It can be quite restrictive, and those who are able to stick well to their budget and don’t really overspend may find that one of the other budgeting methods works better for them.

Alternatively, you could use the cash envelope method in a digital way. There are some great online bank accounts that allow you to separate your money into separate pots, just as you would separate your cash into different envelopes.