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Cash Envelope System Complete Guide: Master Your Financial Life

Cash Envelope System Complete Guide: Master Your Financial Life
Norm Tedford Nov 2, 2019
Want to Earn Some Extra Money?

cash envelope systemChances are you need help controlling your spending.

Contrary to what some people say, the best way to do that is to use cash.

When you use cash for all your purchases, you make more prudent decisions.

Lots of people don’t spend wisely.

That’s because they have no FRIGGIN’ idea how much money they’re blowing on a daily basis.

A huge part of this all-too-prevalent problem is because they make their purchases with credit cards instead of cash.

It’s too easy to pull out that piece of plastic every time you want to buy something.

This makes spending too abstract.

When you swipe a card, you don’t really think about the consequences of your purchases.

And you might be using your card so much, you might start feeling that you’re not really spending money at all.

This is a warning sign that it’s become far too easy for you to spend money, and mindless spending has probably become your new normal.

You start to see money only as something you’re racking up in an electronic ledger thousands of miles away, with no real substance of its own.

This is DANGEROUS because with this kind of relationship with money, your spending will quickly get out-of-control.

A More Tangible Solution

For chronic overspenders, it might help to make things a little more concrete.

Enter the cash envelope system (DRUM ROLL PLEASE).

It’s a simple way of getting your spending under control and can take your budgeting game to the next level.

To use it, you buy things with cash-stuffed envelopes instead of using plastic.

So let’s say you bring home $3,000 a month in after-tax income and you allot $275 per month for groceries.

When you get paid, you’d put this $275 in an envelope labeled “GROCERIES” and would bring this envelope to the store with you whenever you went shopping.

You can only use the cash in this envelope for your groceries.

And when you run out of money, you can’t buy any more groceries until next month.

If you need to get back on financial course, using cash is the best way to do that.

The Psychological Effect of Paying with Cash

There’s this whole psychology behind why the cash envelope system works so well, and it goes like this:

When you’re using actual dollars instead of a piece of plastic when buying stuff, you spend less.

I guarantee you that you’ll spend less when you have to count out cold, hard cash!

This is because when it’s a little painful to purchase something, we value it more.

And using cash is the most painful of all the payment methods.

This compels us to think long and hard about our purchases, and makes you acutely aware of your spending habits.

This is what makes it so powerful!

100-Year Old System

Although the cash envelope system might seem a fashionable way to track your spending, this couldn’t be further from the truth.

It’s well over a century old, and it’s how our great grandparents budgeted their money.

It started way back when everyone used cash to pay their bills.

Back then, they could separate the paper money into different envelopes based on what they needed to buy.

It was resurrected for our digital age by Dave Ramsey, the immensely popular financial guru.

It’s the complete antithesis of the appification of everything.

That’s because it’s a throwback to the days before our mobile devices enslaved us and transformed us into mindless zombies.

Amid our digital glut, we sometimes forget that analog solutions are the best solutions.

The fact of the matter is, using the ridiculously simple system of labeled envelopes stuffed with wads of cash can help us make better spending decisions.

It makes what was previously mindless into something acutely mindful.

This is because when you use this system, you have to reach into your wallet to take out crisp, crinkly dollars bills to pay for that grapefruit gin martini.

It makes you pause for a nanosecond.

Then, you think about whether you want what you’re about to buy.

Or, if you can even afford it.

This kind of self-reflection makes you less likely to do something that’ll kill your budget.

If your self-control could use a little boost, put this deceptively simple, powerful system to the test!

You’ll learn self-control, and you’ll be more in control.

 Obstacles in The Path

Adopting this system might not be an entirely smooth process.

Like everything else in life, you might encounter some speed bumps on the way.

For example, there might be some holdouts in your family whose addiction to credit cards runs deep.

Heck, you might be a credit-card addict yourself.

If this describes you to a “T,” here’s a radical solution for you:

Put all your credit cards save one in a Ziploc bag.

And then, plunge the bag into a bowl of water.

Freeze the entire bowl.

Your cards will be encased in a block of ice, and you won’t be so tempted to use them.

Another problem you might encounter is just getting the hang of the whole darn thing.

It’s going to take some getting used to!

That’s because you might make expenditures from six different categories on a single shopping trip.

And you might be going to eight different stores.

All of this shopping is likely to involve some envelope juggling (the worst act ever at the Big Apple Circus).

You’ll also have to learn to get over your disappointment at no longer accruing credit card rewards.

This is because all of your credit cards but one will be retired.

Another obstacle is you might feel a little foolish about carrying around envelopes full of old-fashioned cash.

After all, it is a little weird.

But never mind about all that!

The thing is, the system works if you give it half a chance.

So school yourself in the details of the system, start applying it, and you’ll obliterate all the pesky obstacles that stand in your way.

Then, the system will become second nature, and you’ll be glad you didn’t throw in the towel at the first sign of difficulty.

A Budget Is A Prerequisite

To make the system work, you’ll first need a budget.

Call your budget a “spending plan” if you’re into euphemisms.

You might already have one.

If so, good for you!

But if you don’t, read up on some of them and pick the one you think is a good fit for you.

There are so many out there!

Most involve tracking your expenses for an entire month.

This is a fantastic idea and an excellent prerequisite to using the cash envelope system.

Not only does tracking your expenses show you what you’re spending your money on, but it’s also the first step towards becoming mindful of your spending habits.

After you gathered some solid data on your spending habits for several weeks, it’s time to figure out how much you’re spending in each category.

Then, you can start setting reasonable limits for each one.

Different Types of Budgets

There are dozens of budgeting approaches that fit a variety of tastes and aptitudes.

There are a bewilderingly large number of budgeting approaches that fit a wide variety of tastes, aptitudes, and inclinations.

When it comes to budgeting your money, there’s no real right or wrong way to do it.

There’s really no right or wrong way either.

As long as you’re tracking your expenses and income in one way or another and you stick to whichever system you choose, you’ll succeed.

A Line Item Budget

I’ll start with the line item method most people are familiar with because all the other methods are based on this one.

To get started, list out all your expenses.

You can get really detailed with your categories and have “household,” “debt,” “transportation,” and “food” all written out.

Then, just transfer these titles to your envelopes.

You should have three columns: estimated spending, actual spending, and what’s leftover.

This way, you can see how well you did and compare your total spending with your income.

This is a traditional budget, and it’s what most people think about when they think about budgeting.

If you’re a left-brained kind of person (meaning you’re logical and linear), then this is the budget for you.

The 50/30/20 Budget

For many people, budgeting in its traditional form doesn’t work.

That’s where proportional budgets come in.

These are things like the 50/30/20 and 80/20 systems.

These budgets are a little freer in form than the line item ones.

With the 50/30/20 system, you spend 50% of your money on needs, 30% on wants, and 20% on savings and investments.

You can tinker with the percentages based on your circumstances.

For example, if you have more debt than most, increase your need amount to 60%.

Budgets should be flexible anyway so that they change when your life circumstances change.

The 50/30/20 budget was popularized by Harvard economist and Congresswoman Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their book All Your Worth: The Ultimate Lifetime Money Plan.

Both of these women say you should base your budget on your take-home income.

This is your income after taxes, health insurance premiums, and other expenses are taken out.

Savings and Investments

Allocate 20% of your money to savings and investments.

These are things like a 401(k) or 403(b), an emergency fund, or an IRA account.

So, money for your 401(k), 403(b), an IRA, or an emergency fund would go in this account.


Needs are the bills you absolutely must pay because they’re essential for your survival.

These are things like what you pay for shelter, insurance premiums, car payments, and utility payments.


Wants are nonessential items.

Versace slippers, a vacation to Barcelona, and the hottest electronic gadgets would fall into this category.

These also include the upgrade decisions you make, like getting a Mercedes instead of a Honda.

Wants are the icing on the cake—all the little things you splurge on to add spice to your life.

Discerning Needs from Wants

It can be incredibly challenging to decide if something is a need or merely a want.

And when using the 50/30/20 system, most people aren’t as rigorous as they should be.

Lots of people blur the line between wants and needs, causing them to justify their spending on desires.

If you work at home, internet expense is a need.

But if you don’t, it’s merely a want.

Clothing, up to a point, is a need.

But after that, it becomes a want.

Fruits and vegetables are a need, but candy is a want.

Things like Netflix, a daily Starbucks allotment, or beer money are most definitely wants.

The 80/20 Budget

If you don’t like having to play the little mental game of separating needs from wants, try the 80/20 budget.

Simply skim 20% off the top for savings and set up envelope categories for the rest.

Of the 20% you save, 15% is for your retirement.

Use the rest for emergencies or your long-term savings goals.

The rest of your money is stashed away in savings.

The Sub-Savings Account Method

With this method, you decide how much money you need to save by funneling your money into sub-savings accounts based on your goals.

To use this system, decide on a goal.

Then, open an account based on that goal.

Give that account a nickname like “Hawaiian Vacation” or “Guitar Lessons.”

Set a monetary amount for each goal.

Then, divide this amount by how many months you have to save up for it.

This will give you how much you should save each month.

If you like this method, decide which goals you’re going to use envelopes for, and which ones get their own sub-account.

Two Types of Expenses

Now it’s time to figure out which categories you’re going to use the system for, and which ones you’re not.

For example, if your cable bill is the same every month and it gets automatically deducted from your bank account, there’s no need to set up an envelope for it.

There are two types of expenses:

  • fixed
  • variable

Fixed costs are expenses in your monthly budget that never change.

Variable expenses are expenses that DO change.

The cash envelope system is for variable expenses only.

Fixed expenses are easy to stick to because they seldom fluctuate.

Come Up with Categories

Come up with a spending category for each envelope.

Here are a few to get you started:

  • Food
  • Entertainment
  • Kids
  • Clothes
  • Car repairs
  • Dining out
  • Personal Allowance
  • Gifts
  • Holidays
  • Vacation
  • Transportation (including gas for your car and Ubers)
  • Household Necessities
  • Haircuts

You can either use the system for every category of spending you have, or just ones you have trouble with.

These are the spending categories where you need to up your budgeting game.

However, I recommend you get radical and apply the system to all your categories.

This will make you a triumphant master of every aspect of your financial existence.

That’s a GREAT feeling!

Make sure the total amount for your spending categories doesn’t exceed your monthly income.

Online Purchases

Include online spending in your cash budget.

Only don’t put any money in this envelope.

For online purchases, use the one credit card you didn’t hideaway.

After an online purchase, take the amount of this purchase from another envelope and put it into your envelope for online purchases.

Put this money in the bank when you get a chance.

Picking a Time Interval

You’ll need to figure out how often you’re going to replenish your envelopes.

Some people fill their envelopes up every week, every payday, or once a month.

It’s entirely up to you.

It doesn’t really matter—just pick an interval and stick to it.

Where to Get the Envelopes

For the envelopes, you can splurge on fancy ones.

If you want this kind, check on Amazon and Etsy.

Or, you can use boring old, plain white envelopes you picked up at the dollar store.

If you want to be super frugal, reuse the envelopes your junk mail came in.

And if you want a budget that’s literally transparent, use Ziploc bags.

This way, you can see the money you have left without even opening the bag.

You can tape a transaction register to the outside.

Whatever receptacle you use for your cash, make sure you track every single transaction.

Write its amount in the register that goes along with each envelope.

To store your envelopes, put them in a plastic container along with your receipts.

Round up to the nearest dollar if dealing with coins is too much hassle.

Then, put your coins in a piggy bank.

Use this money to fund your savings account.

If you have money left over in a category at the end of the month, roll it over to the next month.

This is particularly good to do for your grocery category because then you can stock up when you find a hot sale.

Fixed Before Variable

Once you’ve created your budget, pay all your fixed expenses first.

Then, add up the total amount of cash you need for all your variable expenses.

Go to the bank and withdraw this entire amount.

Figure out which denominations work best to stuff your envelopes, and stuff each envelope with how much it’s supposed to have.

An Extremely Simplified Example

So, you make $3,000 a month, and you want to replenish your envelopes monthly. You could allocate your funds in this way:


  • Internet: $70
  • Electricity: $190
  • Car Insurance: $220
  • Mortgage: $850
  • Heating Oil: $200
  • TOTAL: $1,530
  • Groceries: $200
  • Dining Out: $25
  • Gasoline: $80
  • Car Repairs: $100
  • Personal Allowance: $80
  • Haircut: $25
  • Gifts: $50

TOTAL: $560

You’ll have $910 leftover, which you can put in your savings account.

 No Cheating!


You have to abide by one hard-and-fast rule: you can only spend money if it’s for that particular category.

If you start taking money out of one envelope to pay expenses for another, you’ll destroy your well-ordered system, and financial anarchy will reign.

You don’t want that.

Just remember that when you’re out of cash, you’re all done with spending until you flip your calendar to a brand spanking new month.

Then, you can begin anew.

Don’t Carry All Your Envelopes

Bringing all your envelopes with you everywhere you go might not be a good idea.

You could misplace your cash.

Or, you could get mugged by a half-crazed, very hangry mob of Bigfoots who are jonesing for Slim Jims and need your money to fuel their addiction.

Taking all your envelopes with you only tempts you to spend the entire contents.

The only envelope you should have on your person at all times is your miscellaneous one.

Take your other envelopes only if you’re planning on shopping from that category on that particular day.

Final Words

So there you have it.

Use the cash envelope system and grab control of your spending.

It’s the system our ancestors used 100 years ago, and it’s being revived for our digital age.

Sometimes the old-fashioned solutions are the best ones, and the cash envelope system is no exception.

With the cash envelope system, you can become the undisputed master of your financial existence.

It’s one of the best ways to do that.

Norm Tedford

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