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Cash Envelope Budgeting System

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Following up on my how to create a budget article, I want to share with you a budgeting method called the cash envelope budgeting system. The envelope system of budgeting has been around for long time (it’s believed to have started during the Great Depression). However, it became more popular when Dave Ramsey preached it to his followers as the Dave Ramsey’s Envelope System.

How To Use A Cash Envelope Budgeting System

The idea behind this system is very simple and powerful. It assumes that you handle your income and expenses in cash — which is good because Dave Ramsey wants you to cut up your credit cards anyway. When you cash your paycheck, you put money in envelopes that represent various categories of household expenses — e.g., rent, food, medical, entertainment, clothes, utilities, etc.

You label these envelopes, put the budgeted amount inside, and write the starting amount on the envelope. Whenever you pay for something, you take the money out from the appropriate envelope and write down the new remaining amount. For example, if you start off with $400 in your food envelope and you take out $50 for grocery shopping, cross out $400 and write down $350. If you have change, you can put it back in the food envelope and update the amount, or you can put it into a savings envelope to pay yourself.

The basic rule is that you don’t spend more than what you have in each envelope, and you don’t steal from other envelopes (if you can). The idea is very simple, but I can see that it will probably take a few months to perfect the system. For example, you’ll to make some adjustments to make the system fits your situation if you use credit cards, make automatic payments, have some irregular expenses, etc.

Envelope Budgeting System Video

If you’re a visual learner, this video from NCN Blog will do a better job of explaining the system than I could.

It’s important to note that this system is an extension of the standard budget that I discussed previously. You still need to follow the 7 steps to set up your budget. The cash envelope budgeting system simply makes it easier to follow your plan because it’s more interactive than tracking everything on a piece of paper.

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Baker
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I absolutely love this system.

At first, a thought it was a little “beneath” me. Like I was too good to use this sort of system. I couldn’t have been more wrong. My wife and I have grown to love it and I know for a fact it has helped me control spending and visualize my budget.

Great article, Pinyo!

p.s. love the video from NCN

tom
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tom

This system is good but you can’t use cash for everything. There are certain things you just have to use a credit card.

And that’s fine as long as you have discipline and know how much you can and can’t spend.

Running an all cash system is great because once the cash is gone, its gone and you are not tempted to borrow but it may become a bit depressing for some people.

If you say really need money and you know you will make that money back then credit might make sense.

craig
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Growing up I did this and still may do it for one specific category or item to save up on. For me it’s something more of a reward to myself, whether a vacation or material item. This way I can visually see the money grow in the envelope and it motivates me to continue. I couldn’t imagine doing that for all bills, would get complicated and wouldn’t want that much cash lying around in envelopes.

dora
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dora

My mom taught me how to budget/save this way and I’ve been doing this for years. Having cash available is the great part because when you spend cash it’s painful! Credit cards slow down that painful process to a point that it’s not so bad to blow money, and really, it’s not money anymore. When my bills come due I take the cash I need from the envelope, deposit it in my checkbook and pay the bill. Someone else might like to figure out their budget in on-line “envelopes” and pay with online bill pay. Same idea. Credit cards have… Read more »

Susan from LI
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Susan from LI

I sort of use an envelope for any expenses I can pay with cash – I like it because it also limits my trips to the bank. I get paid, I take out what I’ll need for the month, divvy it up and I’m done. There’s no stopping by the bank for $20 or unplanned splurges at the supermarket. It ends being a huge time saver as well as teaching me how to stay on budget. 🙂

NCN
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I hope you all enjoy the video.
Right now, we are “down” to three envelopes –
We use them for things like groceries / gas / and miscellaneous spending.
I’ve set up “auto” pay for most bills, but I still think that using “real money” makes spending… REAL!
So, especially for folks just starting out, the envelope system is a GREAT way to get started… and, you might find that you’ll just keep on using it.
Rock on,

MoneyEnergy
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MoneyEnergy

I’ve seen this method discussed by other authors, too, without mentioning Dave Ramsey. Probably because it pre-existed Ramsey. I have never tried this method yet, but I think I should give it a try one month at least. It definitely gives tangible meaning to the idea of income allocation. Whatever size your money pool is, you need to allocate it properly, and this method would teach you how to do that consistently.

Tanaya
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Tanaya

How does one start this system when you live paycheck to paycheck in paying your bills. I can’t put our money for a month at a time in envelopes because the bills are due when the checks come in. Our we sh** out of luck here? Any suggestions?

Tanaya
Guest
Tanaya

ok so I have checked out the YNAB website. For someone who has never seen a spreadsheet let alone do one, how easy will it be for me? Also, I noticed there’s not a tutorial for rule#1. How does one get to paying bills on time using this system with rule#1? Our situation is not due to having a bunch of credit card debt, however we do have 1 card. We live paycheck to paycheck just in what it takes to live, utilities,mortgage, one vehicle payment and many, many medical bills due to our 2 children that have congenital kidney… Read more »

Jonathan
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Jonathan

What a totally brilliant idea. We often do this on holiday, when we are working with foreign currency because it’s often easier to work out how much you have to spend daily, but I don’t know why I haven’t thought of doing this back home! My only concern is having too much cash lying around…..

Cash Envelope Budgeting System

by Pinyo Bhulipongsanon time to read: 2 min
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