The Cash Envelope System (with Printable Workbook)

Technology is amazing. We live in a world where almost anything your heart desires is a swipe, a tap, or a click away. Communication is instant, information is easily accessible, and transactions are seamless. From a life-size cutout of Danny DeVito to a last-minute dog walker for Groucho Barks when you’re working overtime, you can get just about anything quickly and with very little effort. 

And for many, that convenience comes at a cost—like waking up to find Danny DeVito propped up in your living room, and realizing that purchase wasn’t actually an emergency after all. 

Debit cards, credit cards, and online payment options separate us from the concept of cash in a way that makes impulse purchases and overspending all too easy to do. The lack of thinking or planning involved with managing money these days makes it more difficult to align your spending with your priorities.

A cash envelope system, also known as envelope budgeting or cash stuffing, is a budgeting method using cash and envelopes that encourages you to create a plan for your money by assigning it to specific  spending categories. Envelope budgeting can help bring more awareness (and balance) to your spending habits and financial goals. 

What is a Cash Envelope Budgeting System?

The cash envelope system is pretty old school—our grandmothers would be amused to hear about the popularity of this current TikTok trend when this was how they routinely managed the grocery budget decades ago. 

The envelope method is an all cash system where you divide your money into envelopes that act as budget categories and then you spend the money from each envelope accordingly.

For instance, if you plan on spending $800 on groceries this month, you’d put that amount of cash into your grocery envelope and you’d pay for your purchases using the money from that envelope at checkout. If you ran out of money before the end of the month, you’d have to get creative with what you have in the pantry or move money from another one of your envelope categories until you could refill your envelope on payday. 

If you prefer to learn by watching instead of reading, check out the video below (but keep scrolling for the free budget planner workbook download):

 The Pros and Cons of  a Cash Envelope System

Advantages:

The envelope system works because it creates a sense of scarcity that helps bring more awareness to your spending. 

Let’s say you’re good on groceries but you’re tired, it’s been a long week, and you don’t want to make dinner. You check your Dining Out envelope and realize there’s not quite enough to cover a nice meal. Now you have to figure out which category/envelope you can move money from in order to make this little luxury happen—is having someone else serve you an entree worth potentially moving money from your tropical vacation fund?

If yes, you’re good to go. But maybe a quick and easy homemade meal is worth making if it means having an extra beach-side margarita. The right answer is whatever decision you make, as long as you did so with intention.

Creating more awareness around your spending makes it easier to save money. And, let’s face it, handing over a stack of cash hurts more than swiping a debit card. Watching that pile grow in its envelope serves as an ongoing source of motivation to squirrel away extra cash towards your savings goals. 

Disadvantages:

The most obvious disadvantage of cash stuffing is that it’s clunky. We live in a world that is no longer designed to accommodate cash—you can’t exactly mail Amazon an envelope full of money. Or maybe you could but it would be confusing for everyone involved. 

Most people still utilize online payments for their bills and fixed expenses, so there will still be bank account deposits and withdrawals and transfers and maybe even spreadsheets (oh the horror!)  to manage. 

Then there’s the risk involved with carrying cash. A friend of mine uses this system and once left a cash envelope wallet with $6000 for all of their monthly expenses in it in a Kroger shopping cart. She got it back, but it gives me heart palpitations even thinking about it. 

The Digital Version of  Envelope Budgeting

A zero-based budget is based on the same concept as cash stuffing and can be managed with an app like YNAB, which is basically the digital version of a cash envelope system (but with more bells and whistles).

You assign a specific amount of money to a budget category, you gradually save for future expenses, and you create a sense of scarcity by making a plan for your money before you’re faced with the desire to spend it. 

Then you just check the amount left in a budget category before spending to see if you have enough to cover a cost or to decide if it’s worth re-assigning money between categories to cover overspending.

YNAB also helps simplify spending decisions with the YNAB Method, which includes Four Rules: 

Rule One: Give Every Dollar a Job

Every time you get paid, ask yourself, “What do I need this money to do before my next paycheck?” and assign every dollar you have available to a budget category (like a digital envelope, that you can’t leave at the grocery store.) This is why it’s called zero-based budgeting; you assign every dollar until there are zero “unemployed” dollars left.

Rule Two: Embrace Your True Expenses

You’ll also create “envelopes” for your variable expenses—those irregular, but not unexpected expenses that pop up from time to time like holiday shopping, annual membership fees, or car repairs. You’ll set small amounts of money aside so that you’ll be ready to pay these in full when they happen. 

Rule Three: Roll With the Punches

If you run out of money in one budget category, you just move money from another one to cover it. No shame or guilt needed—it’s your money and you can spend it how you want. 

Rule Four: Age Your Money

As your awareness grows, you’ll naturally start spending less. Eventually, you’ll be paying bills with money you earned more than thirty days ago. This creates a built-in buffer and allows you to feel the satisfaction that comes with having a pile of money waiting to pay bills instead of a pile of bills waiting for money. 

With YNAB, your actual money stays safe in its bank account, you don’t have to do any math in your head, there are far fewer trips to the ATM, you don’t need to buy envelopes, and you have a digital record of all of your transactions. 

How to Start a Cash Envelope System or Zero-Based Budgeting

Whether you’re following grandma’s recipe with envelopes or hopping onboard the carousel of progress with an app, the basics of setting up a cash envelope or zero-based budgeting system are the same.

Our free printable Change Your Money Mindset budget planner workbook can help you get organized as you go through the steps outlined below, regardless of which method you choose to follow. 

Cash Envelope or Zero-Based Budgeting Basics

Step One: Figure out how much money you have on hand

Calculate how much money you have right now, including cash, checking, and savings accounts. This is how much money you have to assign to budget categories. 

Step Two: Make a list of regular expenses and due dates/frequency

Look back on your bank statements for help compiling a list of regularly occurring expenses, like monthly bills, gas, and groceries and make a note of their due dates or frequency. Estimate how much you spend on each.

Step Three: Make a list of variable expenses and estimate when they’ll occur

Think about infrequent or unexpected-but-predictable expenses. This list of variable and non-monthly expenses might help. Divide the total amount you’d need to cover the expense by the number of months until the expense is expected to happen to figure out how much you should be setting aside each month. In YNAB, a target will help calculate this and will continue to remind you. 

Step Four: Assign a dollar amount to each of the budget categories

Estimate how much you’ll spend in each category and assign every single dollar from step one to one of the jobs from steps two and three. You can assign money you have in savings to a budget category like “emergency fund” or get more specific and allocate some of that money to sinking funds, such as replacing your roof in the future. 

Step Five: Repeat Step Four every time you get more money

Don’t worry about upcoming paychecks—you only assign money that you actually have. When you get paid, decide what that money needs to do.

If you’re using actual envelopes, you’ll label each with its category name and due date and may want to keep track of transactions/deductions by writing them down on the back of the envelope. 

If you’re interested in getting organized about your finances to fund the future you want to live, try a free 34-day trial of YNAB by signing up below. Check our Ultimate Get Started guide for more instructions on getting set up for success.

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