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Cash Envelope Budgeting- Does it Save You Money?

Updated on October 22, 2012

Our family recently enrolled in David Ramsey's Financial Peace University. While this article is not a review of his particular method, we do use his cash envelope system for our monthly budget. Other financial experts have recommended variations of this envelope system. All the principles are essentially the same:

1. You allocate money for different categories.
2. You fill your envelopes up, and when the money is gone, you stop spending.

This article is going to take a closer look at the advantages to this system, as well as the question everyone wants to know....does it really work?

Finally, I will outline the steps we took to make this type of money management work in our home.


Cash envelope categories and setup

When you begin using a cash system, you first have to come up with categories that fit your lifestyle. The trick is to make the categories specific enough that you can keep track of where your dollars are going, but not so strict that you are exhausted by your own complex system.

Secondly, you will want to only use cash for items that you pay cash for! If all your utility bills, mortgage, etc. are paid directly online, then it makes no sense to withdraw the money. Keep in mind, there are some bills that are not so easy to figure out. For example, a water bill comes once a quarter. You'll have to figure out some way to set aside a monthly amount so you have the total when the bill comes due. You essentially have two options:

1. Use an envelope and then redeposit the money.
2. Create another account (like a savings), where you dump your monthly payments for bills that only come once in a while. That way, you won't wonder where its gone just sitting in your checking account.

Anything you can pay cash for, DO!

Here are the categories we chose...

Car Repairs
Furniture Fund
Vacation Fund
Pet Care
School Supplies
Household Items
Hair Care

But what about the perks my credit card gives me?

I know this argument and have used it. The free miles, the free gas, points, cash, whatever. It is true that you get some rewards. However, the problem is this (especially for those in debt):

You will AUTOMATICALLY spend more when you use a credit card. It is like the law of gravity. Cash is different. I'm not really sure how or why, but it is. We tried the cash system for two years and then got pulled into the idea of "rewards". We went back to credit cards, trying to use the same budget system, and ended up in debt.

The reality is that with a cash system, you will spend less. This means that many of these perks you can afford, without getting that annoying interest that creeps up on you.

Try the envelope system for two or three months and see how money starts appearing.

This is the Dave Ramsey Envelope system. It looks like a checkbook with spiral bound heavy duty envelopes inside.
This is the Dave Ramsey Envelope system. It looks like a checkbook with spiral bound heavy duty envelopes inside. | Source
You could use a coupon organizer for your money- Just label the tabs.
You could use a coupon organizer for your money- Just label the tabs. | Source

Making your system work in real life

First things first- make a budget. Figure out how much money you need to keep in the checking account in order to pay the bills. The rest should come out as cash and get allocated.

What kind of envelope system works for you?

  1. You could actually use envelopes, but you will have to replace them every couple of months.
  2. You could use a coupon organizer. Label each tab with your category.
  3. David Ramsey sells a cash envelope system that looks a bit like a checkbook.
  4. If you aren't comfortable carrying a lot of cash, you could create a system at home first, and just grab what you need when you go out. A cash box or safe would work fine.
  5. You could get a binder and use sheet protectors to hold your money.

If you decide to keep most of your money at home, you will have to do a bit of planning when you go out. Without all the money in your hands, it certainly eliminates impulse buys! For those who are fine carrying it in a coupon organizer, be careful about stealing money from one category to pay for something else!

My analysis on the psychology of the cash system.

An Amazing Thing Happened

Our budget was tight. When I say tight- I mean tight. We went through all our bills and figured out how much we could put in each envelope each week. So once a week, Andrew or I would go to the bank and ask for a lump of cash (don't forget to ask for some 5's and 10's so it is easy to divide the money up). We'd come home and stuff our envelopes and here were some examples....

envelope amounts per week...
Food $150.00
Gas $60.00
Car repairs $20.00
Clothing $20.00
Entertainment $20.00
Toiletries $5.00

On and on we'd go til they were all full. I know what you are thinking..."$5.00 for toiletries!? No way!"
Well at first, it was hard. It takes a few months to build up some inventory. But here's what we did.

For the first few weeks, I didn't buy any toiletries (thankfully we had plenty of shampoo and soap). At the end of the month, I had $20.00 just for that stuff. It turned out, I didn't need it until about two weeks later. By then I had $30.00. It was MORE than enough to grab a bottle of shampoo, conditioner, soap, deodorant lotion, and some Chapstick. Then I was set for at least two months. By the time I needed it again, I had $40.00 this time around. Are you seeing how once you get the ball rolling, you should always have enough?

Of course, if your toiletries budget is supposed to be for high end products, you'll have to rearrange your budget some. I'm simply trying to give an example of the snowball effect.

The same thing happened with our clothing budget. We were set with clothes and so for about five months, I let it sit. When it the seasons were changing and we needed some new clothes, I had over $400.00 cash to use.

Psychologically, I felt like my money was growing. Each week, I'd count my cash...and frankly- feel rich! Nothing had changed in our income, but now that sensation of feeling "poor" was gone, and I didn't feel like I had to rebel. I certainly lost my fatalistic mindset about money... "Oh who cares, we're in debt anyway!" kind of thinking.

It also helped me stick to my other budgeted areas. When I would run out of food money and feel tempted to steal $20.00 from clothing, now it wasn't just about giving away a green piece of paper, it was like I held in my hands..."What do you want more right now? A carton of ice cream or a new sweater?" The money had taken on meaning.

That is the power of the envelope system that CANNOT be captured when you use credit cards.

You will get addicted to the free feeling

When you can walk away from a purchase, a vacation, or a dinner out, you will feel such a relief knowing that it won't come back to get you 30 days later when your credit card comes due.

Going to cash does take a little bit of work and effort to get started. But the minute you see those envelopes fattening up with cash, you'll be so glad you switched.


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    • TIMETRAVELER2 profile image

      Sondra Rochelle 

      6 years ago from USA

      Many, and I mean many, years ago I can remember my older brother and his wife using the envelope system and apparently it worked well for them. Personally, I believe the real goal is to get out of debt any way you can. I have lived debt free for many years and it has really paid off for me. I know it takes time to get there, I didn't get debt free over night and I made many sacrifices to make it happen, but boy was it worth it. Nicely done hub, Julie. Voted up.

    • alifeofdesign profile image

      Graham Gifford 

      6 years ago from New Hamphire

      A family member recently took this type of class at the local community school and learned quite a bit about saving (and spending). It seems to be such a basic system, but like so many other systems that appear to be too simple to work, it does. I think in your video you also hit on a very important element. We must all learn to choose. We can not have it all and even if you are one the wealthy fortunate, you should still learn and practice moderation. Interesting hub to read.

    • DDE profile image

      Devika Primić 

      6 years ago from Dubrovnik, Croatia

      Well advised on the topic and to the point

    • Taleb80 profile image

      Taleb AlDris 

      6 years ago

      I heard that they invented credit card to let the people spend money less painfully.

      I find you hub useful.

      Thanks for sharing.

      I have a question "sometimes, you decide that you will spend $20 on toiletries, but you find a very good shampoo offer, what is your reaction here?"

      Thanks again

    • debbiepinkston profile image

      Debbie Pinkston 

      6 years ago from Pereira, Colombia and NW Arkansas

      Thank you Julie! My first husband and I used the envelope system and it worked to some extent, except that when we ran out of money in one envelope we would "steal" from another envelope.

      I do like Dave Ramsey's advice and I am working on paying off my credit cards, then my car, then save some, etc...It's sound advice.

      Thanks for a great Hub!

    • Gypsy48 profile image


      6 years ago

      Voted up and useful. With money being tight for many of us, this is a good idea to stay on a budget and handle expenses from month to month.

    • rfmoran profile image

      Russ Moran - The Write Stuff 

      6 years ago from Long Island, New York

      Excellent hub on a great idea. I am a tracking freak and have been using Quicken for over 20 years. Quicken can work with this system - just show a cash expense in the register - make sure to put an adjusting entry so it doesn't screw up your bank rec. Voted up and useful

    • bac2basics profile image


      6 years ago from Spain

      Hi Julie. This is such a great hub I am going to link it to one of mine. When I first started out on my own I had a cigar box and sectioned this off to keep my cash. In those days I had nothing on standing order at all, everything had to be paid over the counter when it was due. Anything left in the box come payday was used to buy electricity or gas stamps ( coupons) or clothes or shoes for my daughter, or whatever was really needed. It´s very easy to impulse buy when you are handing over a piece of plastic, but much harder when you are handing over cash. And your analogy " well were in debt anyway so what does it matter" is very very true. Great hub and very sound advice.

    • AudreyHowitt profile image

      Audrey Howitt 

      6 years ago from California

      Just excellent Julie--very practical way to approach the issue--I use envelope for saving--kind of like a Christmas club layaway system---

    • Michael Tully profile image

      Michael Tully 

      6 years ago

      The key to success with the envelope system, as with any budgeting plan, is the self-discipline it takes to stay with it. One drawback I can see to the plan might be that it's a bit cumbersome at the check-out counter. For example, if you went to check out at a supermarket with a shopping cart containing food, pet care items, school supplies, household items, toiletries, and hair care products, the people behind you in line might get annoyed at the time it takes you to fish your money out of six different envelopes. If there's a better way to handle this end of the process, that might be an appropriate subject for a follow-up Hub. Voted up, interesting and useful.

    • Kimberly Vaughn profile image

      Kimberly Vaughn 

      6 years ago from Midwest

      I have been wondering about this system and how it would work. I think I am going to try it. Great hub! Voted up!

    • billybuc profile image

      Bill Holland 

      6 years ago from Olympia, WA

      It's weird how some ideas all of a sudden show up on HP...this is the second about this subject that I have read in three days, and I've never seen one before in nine months. It's a great idea, one I've used in the past. All that is needed is a willingness to stick to the plan.

    • Janine Huldie profile image

      Janine Huldie 

      6 years ago from New York, New York

      Julie, great advice and I am always trying to figure out how this truly works, because I pay all my bills online and don't usually take anything from the bank. But do like the essence of your article and may have to try this, because money just doesn't seem to be going as far these days. Have of course voted and shared all over!!


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