Starting an envelope system along with a consistent monthly budget is absolutely the best way to operate your finances, period. If you consistently have trouble knowing where all your money goes, and having the discipline to keep from spending too much, then using an envelope system (along with a detailed budget) to manage your finances will get you on the right track financially and keep you there.
Best of all, it’s not as complicated as you think.
In today’s post I’ll show you:
How the envelope system works
Why you need it
Apps you can use
A tutorial video
Plus a FREE cash envelope worksheet template PDF download.
Scroll further down for the video and worksheet template.
The definition: the envelope system is a simple way to distribute cash from your monthly budget to use for your daily expenses. You place cash in an envelope for each category of your budget to spend throughout the month. When the cash is gone from the envelope, you don't spend any more on that category.
For instance- if you budget $300 for eating out this month, you will put that amount in your “Restaurants” envelope. Every time you eat out, you use the money in that envelope to pay the bill.
If you use all the money in that envelope before the month is up, you don't go to a restaurant until you complete your next monthly budget and replenish the envelope. It's a simple way to ensure you never spend more than you make!
You should use envelopes for frequent expenses in your budget, such as:
Groceries
Restaurants
Gas
Haircuts
Clothing
School supplies
Gifts
Entertainment
Cosmetics
…anything else you frequently spend money on
Why The Cash Envelope System Works
One of the biggest problems I see with people who are in debt is that they don’t have complete knowledge about how much they spend. The result is that they spend more than they make month after month using credit cards and other debt. Doing this for years on end eventually results in huge amounts of debt.
My friend Jeremy Biberdorf from ModestMoney writes, “If you are constantly having to borrow money to make ends meet at the end of the month, you are not budgeting effectively. This suggests that you are living a lifestyle which is beyond your means. You need to adapt your lifestyle so that your spending is realistic.”
Debt and credit cards will be a thing of the past!
Common Myths About the Cash Envelope Method
Before I show you how to start using the envelope method for budgeting, I’d like to dispel a few myths that keep many people from ever getting started:
It’s Complicated- A budget, along with using a cash envelope system, is really pretty easy. When it comes down to it, it’s just 3rd grade math. The hardest part is just learning to do things differently and develop new habits. The first few months will be weird. But when you stick with it, the envelope system becomes your normal mode of operation.
Isn’t It Dangerous To Carry Cash?- It’s no more dangerous than carrying credit or debit cards. If someone wants to steal from you, they will do it no matter what form of money you carry.
Do I Have to Save Up a Bunch of Money to Start an Envelope System? Absolutely not! You use the money from your current paycheck to fund your envelope system.
What If You Don’t Like to Carry Cash? Use These Envelope System Apps
Although carrying cash is just fine (it’s what I do), I realize that some just don’t want to do it.
If you’re dead set against carrying cash in envelopes, you do have options. There are several apps available that make using the envelope method easy using an electronic virtual envelope system.
The top apps that I and my personal finance blogger buddies recommend, are:
Mvelopes– Free for the first month, pay for more features
EveryDollar– Free for limited features, pay for advanced features
Each of these apps are free to get started, but to use the advanced features you’ll need, there is a cost involved. However, if you don’t like carrying physical cash, you may find the cost is worth it.
How To Start Using the Cash Envelope Budgeting System
Here's my tutorial video showing you how to implement your cash envelope system. Below the video, you will find a link to my FREE PDF envelope system worksheet template, as well as the budgeting worksheets I mention in the video.
Now let’s start with the “how to” part of beginning your own cash based envelope system:
Start With a Budget
First, you should be doing a monthly, zero based budget. This allows you to account for every dollar coming in and every dollar going out.
It’s a forward looking plan for the month ahead that allows you to get total control of your money and never spend more than you make. It’s a way to spend all your money on paper before you spend it in the real world.
Once you’ve been paid and done your written budget, you now have a game plan for how you will spend your money for the month.
Once your budget is finalized on paper, then pay all your regular bills. Most people don’t normally pay cash for things like the phone bill, electric, water, cable, mortgage/rent, and so forth. Just pay these as you normally would by:
Using the electronic bill pay feature on your bank’s website
Sending in a check
Using a debit card
I usually pay our bills and our tithe every month through our bank or with a debit card.
Figure Out Which Budget Categories Require Cash
Obviously, you don’t have to use cash for every budget category. Just make a cash envelope for those that you will need on a frequent basis such as groceries, restaurants, gas, entertainment, clothing, cosmetics, etc.
It really doesn’t matter what categories you make a cash envelope for, as long as you define those categories ahead of time.
Add’em Up and Write a Check
Once you know which budget categories you want to use cash for during the month, get out some envelopes and label each one with a specific category.
Next, add up all those categories and get a grand total of how much cash you will need to get from the bank to put in your envelopes. Then withdraw that cash from the bank and fill each envelope with the amount designated in your budget.
Now you have the correct amount of money in each envelope, and you can start spending that money as you need it throughout the month.
Remember, the cash in your envelopes has to last the entire month! So spend it judiciously and make sure you don’t use it up too quickly. If you spend all the money in an envelope, that’s it for the month, so make it last.
If you spend all your restaurant money in the first week, you will be stuck eating leftovers at home until next month, so pace yourself.
No Stealing From Your Envelopes
If one of your envelopes does run out of money, you might be tempted to “steal” money from another envelope. Beware, that will bite you in the behind because then you won’t have enough in the envelope you stole from.
It’s a vicious cycle that you don’t want to get started. If an envelope runs out of money, you may want to reevaluate when it’s time to fill out your next monthly budget and add to that category if necessary. Remember, no stealing,discipline is the key!
What If You Have Extra Money Left Over?
If you have a little extra money left in an envelope at the end of the month, that’s great! It shows that you used discipline in your spending. You can leave that money in the envelope to get a head start on next month. Or you can spend it on a special treat if you like, it’s totally up to you!
If you have a lot of money left in an envelope, you should probably tweak your budget next month because you overestimated how much you would need. If you have a lot of money left, I would recommend putting that in savings or leaving it in the envelope to get a head start for next month.
What About Non-Monthly Bills?
If you have a bill you pay every 3 or 6 months, such as car insurance, you can split that bill into monthly increments and place it in an envelope you keep in a safe place.
For instance, if your car insurance is $600 every six months, then put $100 each month into an envelope labelled “Car Insurance”. Then when it comes time to pay that bill you have the money available to pay it in full without having to scramble and figure out how to pay such a large expense.
Easy peasy!
Using an Envelope System Just Flat Works!
When you start your own envelope system and use cash to fund your lifestyle, your finances just make more sense. Even better, you will never again spend more than you make!
It’s really not all that difficult to do once you start making the effort. Yes, it’s a little strange at first, just as it is anytime you’re starting a new habit. But you will find that the more you do it, the more natural it becomes, and eventually you’ll wonder why you ever handled your hard earned money any other way.
So go ahead, get started with your own envelope system today if you haven’t already.
Your wallet will thank you!
Questions? If you started using the envelope for budgeting and you're having trouble, shoot me an email. I’ll be happy to help you out in any way I can!
Thanks Scott. I read your post and GoodBudget looks interesting… I’ll definitely check it out. Whether your envelope system is electronic or physical cash, I still believe it’s by far the best way to get total control over your money and never spend more than you make. Thanks again!
Since I commented 2 years ago, we have tweaked our system even further. Yes, we still use cash/envelopes for certain categories…and always will because IT WORKS!
What we changed is we no longer have 1 account for quarterly/semi-annual/annual bills. Seeing that large amount all in 1 place was just too tempting, even though we knew every dollar was already accounted for. So I created separate savings accounts in Ally (on-line bank) for each and every line item. It is between 20-25 accounts. Went a step further and created 6 separate accounts for emergency fund (month 1, month 2, etc.) — ok, that is a bit much, but it works for me because I am such a numbers person.
After moving the money out of the large account & putting into the smaller ones, I then figured out exactly how much per account was needed monthly to fund that account to meet the yearly goal. Most were fully funded, yet I still figured out the monthly need as if it were empty. The amounts ranged from $10 – $135. I then set up automatic transfers on the 29th of each month for the individual dollar amount per account. For the ones fully funded, I put that money into my “whoops/JIC” account … just in case, because we all have those situations. I also created a spreadsheet showing the amount per account for each month…because my husband is always asking how much do we have in such-and-such account.
Yes, this took me FOREVER to set up, and I was avoiding doing so because I knew it was time consuming. However, the unexpected and very pleasant benefit is now my weekly money review sessions take only 20 minutes; whereas previously, it took me hours.
Like I said, I am a numbers person and we are loving this system…..for us.
Wow Kathy, that’s a level of detail that most people will never achieve! But the great thing is that this works for you, and that’s what counts. A lot of people could learn from your example. Keep up the great work!
I totally agree the envelope system works. We switched to it 2 years ago and will probably use it for the rest of our lives now. We have paid off twice as much as we did before cash only. I love them so much I have even started making and selling my own pretty envelopes in my Etsy store. If you have a chance please check it out.
Awesome!!! I checked out your envelopes and they are beautiful! Great way to make extra money to pay off debt and supplement your budget. Great job and and great idea!
I am helping my daughter who is a single mom with 4 small children do this system as she just can’t manage her money any other way. She is on such a tight budget its the only way she can live within her limited income and make it through each month to provide for her children and pay her bills. She withdraws her cash and puts it into each envelope 2x a month from her child support checks. I made her a “homemade” envelope holder for her BUDGET BOOK as we call it. This is a video I made of how I made the BUDGET BOOK just from things laying around my office-craft room. https://youtu.be/My6IK3p-zmM She absolutely loves this system and her homemade BOOK. It is freedom to her!
I think this would be the best way to do things, but because of all the moves we have done it has really put our finances in a horrible spot. No matter what we do, we can’t seem to get out of debt. It’s really putting a strain on everything. He sees us as getting better, but I don’t. I don’t want too much information just tossed out there for the world to see, but I’m not sure how to start this with everything always spoken for. What’s the best way to do this because I’m tired of living paycheck to paycheck.
The best way to start is by first doing a written zero based budget. You can find a link to my budgeting forms at the top of this page in the navigation tabs.
Once you do that, just distribute money into envelopes for your monthly spending on things like gas, groceries, clothing, restaurants, cosmetics, gifts, etc. If you find that you’re not making enough to cover expenses, then you have two choices, you can cut spending way down, find ways to make more money, or do both. Your best bet is usually to do both because it can really accelerate paying off debt when you apply the extra money only toward debt.
The main thing is that you can’t keep doing things the same way that got you into debt in the first place. By the way, I do have a get out of debt course that you may want to check out. It shows you every step you need to get completely out of debt and allows you to make a get out of debt plan you can follow that’s customized to your own situation.
It’s the exact same process my wife Angie and I used to get out of debt, so I can tell you from personal experience that it absolutely works! You can find out more about it at the following link: http://www.udemy.com/celebrating-financial-freedom
If you are behind on bills then how are you able to start this process? Do you need to save up to start fresh or how would that work? I have a spreadsheet that I use monthly and there are ALWAYS things left over to carry to the next month.
You don’t have to save up money to get started. The envelope system is funded only with money from your paycheck. If you don’t have enough money to cover bills, then it may be necessary to cut spending, find ways to make more money, or both. I always recommend doing a written budget to keep close track.
I want to start the system, but I – like others – am finding that starting seems to be the most difficult part. My husband and I get paid every other week on the same week. We have more than one checking account and my paycheck goes into one account and his goes into a different account. So I would need to pull money from each paycheck out of each account…Plus I have a certain amount scheduled to be pulled out and transferred into a savings account (this just started so we don’t have much built up)…How would you suggest we get the initial funds for starting our envelope system when we live paycheck to paycheck?
What I usually recommend is that you each have your paychecks deposited into one central account, then do your budget plan and distribute the money from there. You can still have your automatic deductions taken out as they always have been, just make sure they are accounted for in the budget.
You really don’t need any extra funds to get your envelope system started, because you are making a plan before you actually spend any money. As soon as you finalize your budget, then withdraw the cash you need and distribute it to the envelopes. This is money you are already spending now, but instead of spending it out of your account as the month progresses, you are now spending it out of the envelopes.
I hope I explained that clearly enough. If not, let me know and hopefully I can clarify a little further.
Hi- my fiancee and I are looking at starting an envelope system and the one question that we have is how do we come up with the initial (in our case) $705 to stuff our envelopes. The problem that we are seeing is pulling that large sum at the beginning of the month when many of our larger bills are due. I understand that after the initial month, there would be money left over from the previous month to cover the amount, but getting started seems to be our issue. We have saved up a small $1000 emergency fund and are working on a debt snowball (so far paying off two small credit cards) and I’m wondering if this means we should put the debt snowball on hold for a month to save up the initial $705 to start the envelopes, or if we can run it on two $352.50 withdrawls- one on each paycheck?
This seems like getting started should make more sense to us than it does.
You could put the debt snowball on hold for a month to fund your envelopes, that might be the best solution when you’re getting paid twice per month. Then you should be able to fund half the month out of each paycheck from there.
Good luck getting started! If you have any more questions, just let me know…
I’ve used the envelope system for several months now & I have an envelope for “other”. This way if an envelope is empty and I need (or “need”) to spend more in that category, I don’t have to “steal” from another envelope. It’s not a large amount & as the months go on I’ve used less from it.
I was one of those “oh, using cash won’t make such a big difference”, so I resisted it for years. Well, was I proven wrong! I was blown away at what a difference it made. And, yes, it took some getting used to using cash instead of swiping my credit card. Especially in the grocery store line where people would loudly sigh because it took me a few extra seconds getting the money out. (I cringe to think I used to be one of those.). Now there is no difference in my speed because it is just second nature for me to use cash. Added bonus? I’ve lost weight because I no longer throw extra items in my cart because they’re on sale — usually those items were cookies or ice cream or salty snacks.
Instead of envelopes, I use an inexpensive, plastic coupon organizer purchased at the Dollar Store. Same premise, and it withstands the constant use better than paper envelopes. Additionally, I have a separate bank account for quarterly, semi-annual, and annual bills and fund it like you outlined in your post. Having the cash in an envelope was just too tempting for me.
Thanks so much for your comment! It’s great to hear from someone that has actually done it. When I teach people to ditch the credit and go cash only, they look at me like I have two heads. However, I’ve never talked to anyone who has gone cash only and used an envelope system that said it didn’t change their financial life for the better.
You’re living proof that this stuff really does work!
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The envelope system is great – and I’m using it myself. But there are other, easier ways to cut expenses which I detail here:
http://richwithnojob.com/2017/05/11/how-im-reducing-my-budget-by-1k-this-month/
I’ve found that using “GoodBudget” is key for me regarding the envelope system as I don’t use cash for anything.
Thanks Scott. I read your post and GoodBudget looks interesting… I’ll definitely check it out. Whether your envelope system is electronic or physical cash, I still believe it’s by far the best way to get total control over your money and never spend more than you make. Thanks again!
Since I commented 2 years ago, we have tweaked our system even further. Yes, we still use cash/envelopes for certain categories…and always will because IT WORKS!
What we changed is we no longer have 1 account for quarterly/semi-annual/annual bills. Seeing that large amount all in 1 place was just too tempting, even though we knew every dollar was already accounted for. So I created separate savings accounts in Ally (on-line bank) for each and every line item. It is between 20-25 accounts. Went a step further and created 6 separate accounts for emergency fund (month 1, month 2, etc.) — ok, that is a bit much, but it works for me because I am such a numbers person.
After moving the money out of the large account & putting into the smaller ones, I then figured out exactly how much per account was needed monthly to fund that account to meet the yearly goal. Most were fully funded, yet I still figured out the monthly need as if it were empty. The amounts ranged from $10 – $135. I then set up automatic transfers on the 29th of each month for the individual dollar amount per account. For the ones fully funded, I put that money into my “whoops/JIC” account … just in case, because we all have those situations. I also created a spreadsheet showing the amount per account for each month…because my husband is always asking how much do we have in such-and-such account.
Yes, this took me FOREVER to set up, and I was avoiding doing so because I knew it was time consuming. However, the unexpected and very pleasant benefit is now my weekly money review sessions take only 20 minutes; whereas previously, it took me hours.
Like I said, I am a numbers person and we are loving this system…..for us.
Wow Kathy, that’s a level of detail that most people will never achieve! But the great thing is that this works for you, and that’s what counts. A lot of people could learn from your example. Keep up the great work!
I totally agree the envelope system works. We switched to it 2 years ago and will probably use it for the rest of our lives now. We have paid off twice as much as we did before cash only. I love them so much I have even started making and selling my own pretty envelopes in my Etsy store. If you have a chance please check it out.
https://www.etsy.com/shop/CraftySundays?ref=hdr_shop_menu
Awesome!!! I checked out your envelopes and they are beautiful! Great way to make extra money to pay off debt and supplement your budget. Great job and and great idea!
I am helping my daughter who is a single mom with 4 small children do this system as she just can’t manage her money any other way. She is on such a tight budget its the only way she can live within her limited income and make it through each month to provide for her children and pay her bills. She withdraws her cash and puts it into each envelope 2x a month from her child support checks. I made her a “homemade” envelope holder for her BUDGET BOOK as we call it. This is a video I made of how I made the BUDGET BOOK just from things laying around my office-craft room. https://youtu.be/My6IK3p-zmM She absolutely loves this system and her homemade BOOK. It is freedom to her!
I think this would be the best way to do things, but because of all the moves we have done it has really put our finances in a horrible spot. No matter what we do, we can’t seem to get out of debt. It’s really putting a strain on everything. He sees us as getting better, but I don’t. I don’t want too much information just tossed out there for the world to see, but I’m not sure how to start this with everything always spoken for. What’s the best way to do this because I’m tired of living paycheck to paycheck.
The best way to start is by first doing a written zero based budget. You can find a link to my budgeting forms at the top of this page in the navigation tabs.
Once you do that, just distribute money into envelopes for your monthly spending on things like gas, groceries, clothing, restaurants, cosmetics, gifts, etc. If you find that you’re not making enough to cover expenses, then you have two choices, you can cut spending way down, find ways to make more money, or do both. Your best bet is usually to do both because it can really accelerate paying off debt when you apply the extra money only toward debt.
The main thing is that you can’t keep doing things the same way that got you into debt in the first place. By the way, I do have a get out of debt course that you may want to check out. It shows you every step you need to get completely out of debt and allows you to make a get out of debt plan you can follow that’s customized to your own situation.
It’s the exact same process my wife Angie and I used to get out of debt, so I can tell you from personal experience that it absolutely works! You can find out more about it at the following link: http://www.udemy.com/celebrating-financial-freedom
If you are behind on bills then how are you able to start this process? Do you need to save up to start fresh or how would that work? I have a spreadsheet that I use monthly and there are ALWAYS things left over to carry to the next month.
You don’t have to save up money to get started. The envelope system is funded only with money from your paycheck. If you don’t have enough money to cover bills, then it may be necessary to cut spending, find ways to make more money, or both. I always recommend doing a written budget to keep close track.
I want to start the system, but I – like others – am finding that starting seems to be the most difficult part. My husband and I get paid every other week on the same week. We have more than one checking account and my paycheck goes into one account and his goes into a different account. So I would need to pull money from each paycheck out of each account…Plus I have a certain amount scheduled to be pulled out and transferred into a savings account (this just started so we don’t have much built up)…How would you suggest we get the initial funds for starting our envelope system when we live paycheck to paycheck?
What I usually recommend is that you each have your paychecks deposited into one central account, then do your budget plan and distribute the money from there. You can still have your automatic deductions taken out as they always have been, just make sure they are accounted for in the budget.
You really don’t need any extra funds to get your envelope system started, because you are making a plan before you actually spend any money. As soon as you finalize your budget, then withdraw the cash you need and distribute it to the envelopes. This is money you are already spending now, but instead of spending it out of your account as the month progresses, you are now spending it out of the envelopes.
I hope I explained that clearly enough. If not, let me know and hopefully I can clarify a little further.
Hi- my fiancee and I are looking at starting an envelope system and the one question that we have is how do we come up with the initial (in our case) $705 to stuff our envelopes. The problem that we are seeing is pulling that large sum at the beginning of the month when many of our larger bills are due. I understand that after the initial month, there would be money left over from the previous month to cover the amount, but getting started seems to be our issue. We have saved up a small $1000 emergency fund and are working on a debt snowball (so far paying off two small credit cards) and I’m wondering if this means we should put the debt snowball on hold for a month to save up the initial $705 to start the envelopes, or if we can run it on two $352.50 withdrawls- one on each paycheck?
This seems like getting started should make more sense to us than it does.
You could put the debt snowball on hold for a month to fund your envelopes, that might be the best solution when you’re getting paid twice per month. Then you should be able to fund half the month out of each paycheck from there.
Good luck getting started! If you have any more questions, just let me know…
I’ve used the envelope system for several months now & I have an envelope for “other”. This way if an envelope is empty and I need (or “need”) to spend more in that category, I don’t have to “steal” from another envelope. It’s not a large amount & as the months go on I’ve used less from it.
I think an “other” envelope is a great idea. Especially when you’re just starting out.
I was one of those “oh, using cash won’t make such a big difference”, so I resisted it for years. Well, was I proven wrong! I was blown away at what a difference it made. And, yes, it took some getting used to using cash instead of swiping my credit card. Especially in the grocery store line where people would loudly sigh because it took me a few extra seconds getting the money out. (I cringe to think I used to be one of those.). Now there is no difference in my speed because it is just second nature for me to use cash. Added bonus? I’ve lost weight because I no longer throw extra items in my cart because they’re on sale — usually those items were cookies or ice cream or salty snacks.
Instead of envelopes, I use an inexpensive, plastic coupon organizer purchased at the Dollar Store. Same premise, and it withstands the constant use better than paper envelopes. Additionally, I have a separate bank account for quarterly, semi-annual, and annual bills and fund it like you outlined in your post. Having the cash in an envelope was just too tempting for me.
Good post! Thanks for sharing your experience.
Thanks so much for your comment! It’s great to hear from someone that has actually done it. When I teach people to ditch the credit and go cash only, they look at me like I have two heads. However, I’ve never talked to anyone who has gone cash only and used an envelope system that said it didn’t change their financial life for the better.
You’re living proof that this stuff really does work!