Smart Savings: Could You Benefit from A Cash Envelope System?

updated Jul 17, 2020
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(Image credit: Alexis and Nathaniel)

In our largely cashless society, it’s easy to go days without touching an actual dollar bill. While there’s tons of convenience that comes with credit and debit cards, the downside is that money seems less real and it’s easier to overspend when payments appear in the distant future. The cash envelope system is one way to counter that.

1. Create Your Household Budget: Sit down and figure out your income and expenses each month. Make sure you include everything, including car expenses, utilities, tax, food, and entertainment. If you’ve never created a budget, you can read up here and here.

2. Dedicate One Envelope for Each Category: Use one envelope for every one of your budget categories. Don’t worry about large, single payments like rent — just write a check for that vs. sending cash in the mail. They even make wallets specifically designed for this system, without multiple pouches sewn in.

3. Organize Your Cash: After you take out your budgeted amount out of the bank or ATM, divide the money into each envelope or pouch. If you are using paper envelopes, it helps to write the starting amount down (so you can subtract what you spend as you go along).

4. Use Cash for All Expenses: Every time you go to buy something, take the amount you need out of the correct envelope. Once the cash is gone, that’s it. Of course, you can pull from another envelope (hopefully from less important categories like “entertainment” vs. “food”) but that only means you have less to spend in that second category.

There’s much to like about this system — if you aren’t great about paying your credit card bill in full every month, or sticking to you budget — it’s a helpful way to visualize spending and keep you on track. But there are obvious limitations. You will forgo the convenience of on-line bill pay. You’re also walking around with a bunch of cash all the time, and have no means of redress if you lose it, or it gets stolen.

What do you think? Would envelope budgeting work for you?