How to Use the Cash Envelope System to Save Money

Disclaimer: This post may contain affiliate links. I would earn a little money with no extra cost to you. The opinions expressed are my own. Read my disclaimer to learn more.

[Updated 9/10/2020]

I’ve avoided writing about the cash envelope system for a while.

I’m honestly not even sure why. Maybe it’s because so much has already been said about it.

The truth is though, using Dave Ramsey’s cash envelope system transformed our lives and helped us stick to a budget for the very first time.

In a very short time we learned to:

• Control our spending
• Stick to our budget
• Plan ahead and be intentional with our money (instead of impulse buying)
• Prioritize our expenses
• Use money to reach our goals faster

And it all started with the Dave Ramsey budget envelope system.

So today I’m going to share how it all works, plus our story using cash envelopes and how it changed our lives. And based off our experience (and thousands of others), I’m confident it can change yours too.

What is the Cash Envelope System?

Dave Ramsey is a big name in the personal finance and budgeting world. 

And with good reason.

His programs, books, and money philosophy has helped millions of people turn their finances around and pay off stupid amounts of debt.

We are two of those people.

Before discovering Dave Ramsey, we owed $100,000 of combined debt. Student loans, credit cards, and car payments oh my!

We devoured everything Dave Ramsey. We read his blog, signed up for his emails, and most importantly, started applying the principles we learned to our lives.

Dave Ramsey’s cash envelope system and his baby steps paved the way for us to pay off that $100,000 of debt in 5 years. It didn’t happen by luck. It took hard work, and more importantly, we made choices to be more intentional with our money.

Our cash envelopes were a big part of our success. And I think they can get your foot in the door of budgeting and financial success.

How does the Cash Envelope System Work

The basic principles of using cash envelopes is to:

• Create spending categories that allow you to pay cash
• Write the names of each spending category on the front of an envelope
• Decide how much cash you NEED to have in each category (you know, make a budget)
• Withdraw cash and put it in your envelopes
• Keep the envelopes in a safe place (purse, wallet, at home)
• Spend the cash as you need it
• When the cash is gone, you don’t get to spend more in that category until next month

If you’re more of a video person, watch this quick 5 minute video to get set up with your own cash envelope system!

Why Does the Cash Envelope System Work to Save Money

A huge reason this works is it limits EXTRA spending. If you run out of money in your envelope, you can’t spend the money. It’s as simple as that.

But money is also tied very closely with psychology.

The way we think about money matters because our thoughts shape our habits. So if you want to change your habits with money, you need to start changing the way you think about money, and your process of handling money.

If you train your brain to know that you can’t spend more money than what is in your envelope, you’re guaranteed to stick to your budget. 

It eliminates extra spending, impulse buying, and forces you to think intentionally about every purchase.

For example, let’s say you want to treat yourselves and cook a fancy meal. You’ve been craving shrimp and ribeye steak for a while and want to make it happen.

But it will be waaay more than you usually spend on food. As a result, this one meal will affect your grocery budget for the rest of the month. 

Do you treat yourself and live really lean for the rest of the month? Because once your envelope runs out of money, you’re done spending for the month.

Or do you stick to your cash envelope budget and eat more modestly?

We’ve put so many food items back on the shelf because it wasn’t worth it to throw off our budget, or simply, it didn’t fit into our budget.

We didn’t want to eat rice and beans for the rest of the month because of impulse shopping or a big splurge.

And back to psychology for just a minute.

There’s something about physically handing over cash that makes people more hesitant to spend money. 

It’s easier to swipe a card. You don’t have to think about where the money is coming from. It’s just there.

But with cash, you watch it leave your wallet. And if you use cash envelopes, it’s even harder to part with your cash knowing you have a very specific budget you need to stick to for the month.

As a result, we cut our spending, saved more money, and paid off our debt a lot faster.

How Do I Start Using the Cash Envelope System?

The good news is, it’s super easy to get started with cash envelopes. Follow these 3 steps and you’re ready to go.

1.Write Down Your Spending Categories

Take a few minutes and think of everything you spend money on during the month, and actually write it down.

Then put a star next to everything you can pay for in cash. If you need a few ideas, you can steal my cash envelope categories.

• Groceries
• Gas
• Household (laundry detergent, toilet paper, soap, toiletries, etc)
• Date Fund
• Your Name Personal Allowance
• Spouse’s Name Personal Allowance
• Community (when we hang out with friends)

You can keep it super simple, or make a dozen categories. It’s totally up to you. 

The important thing to remember is using the cash envelope system starts to create new spending habits and helps you be more intentional with your money.

2. Make Envelopes to Store Your Cash

You can have some fun with this step.

I’ve seen people color code their envelopes, decorate and draw on them, write in fancy fonts, and other ways to personalize their cash envelopes. Personalization will also help you easily organize them and find a specific envelope easily.

Once you have your envelopes, you’re basically ready to go. 

We actually didn’t use real envelopes at all. Instead, we bought a little collapsible file folder with different tabs for each of our categories.

It helped us separate our money and keep it more organized. 

Sometimes we carried the whole folder around with us, other times we just grabbed the cash out before we left the house.

Use whatever system works for you. If you like your system, you’re more likely to use it.

Now that you have your cash envelope categories, you’re basically ready to go. 

3. Withdraw Cash and Put it in Your Envelopes

Not a lot of explanation needed here. But depending on how you get paid, there might be some strategy involved. Keep reading to learn more.

When is the Best Time to Withdraw Money to Put in My Cash Envelopes?

There isn’t a one size fits all answer to this question. It really depends on how you get paid.

We get paid every two weeks. So for us, I divided our monthly budget amounts by two and withdrew money twice a month after we got paid.

For example, our grocery budget was $250. After our first pay day, I took out $125 and stashed it in our grocery envelope. Then I repeated the process on our next pay day. And I did the same thing for every cash envelope we had.

If you get paid once a month, withdraw all of your cash at one time. Or once a week, even once a day.

Seriously, whatever is most convenient for you is what will work the best.

Cash Envelope System FAQs: Tips and Tricks We Used to Help Our Budget (and Peace of Mind)

One thing I learned while using the Dave Ramsey cash envelope system is, well, it’s not a perfect system.

The world is full of “what if’s” and it’s important to be flexible enough to roll with your circumstances. 

Here’s a list of circumstances we encountered, and creative solutions to help you problem solve.

I forgot my cash envelopes at home! What do I do now?

This happened to us A LOT! 

But there’s no reason to stress. After you’ve been using cash envelopes for a month or two, you should have a pretty good idea how much is in each envelope at a given time of the month.

It won’t be perfect, but you can make a good guess. 

It’s okay to swipe a card to buy your weekly groceries as long as you take money out of your envelope and deposit it into your debit card account. 

Then it’s a wash. Problem solved.

My spouse is out shopping and he doesn’t have the right cash envelope.

The same solution works as if you forgot your cash envelopes.

If you’re driving by the store on the way home from work. You suddenly remember you need more milk, so stop at the store and buy a gallon.

When you get home, take money out of your envelope to deposit later in the week.

I feel so restricted by our cash envelopes! I feel like I can never buy anything for myself!

Totally been there.

I remember driving with my wife Jenna talking about how tight our budget was. We’d only been budgeting and using cash envelopes for maybe six months.

Jenna, who is a self-proclaimed wanter, was stressed and on the verge of tears because she didn’t feel like she had permission to buy ANYTHING if it wasn’t in the budget or part of our cash envelope system.

It sucked to see her so upset and frustrated by this. I hated it.

We knew we needed a solution to relieve the stress or we might stop budgeting altogether. 

And you can only cut expenses so much. You can’t cut everything.

So we gave ourselves an allowance. Each of us got a $25 personal allowance every month that we could spend however we wanted with zero judgement from each other.

It wasn’t much, but helped so much. And we included it in our cash envelope system too.

What do I do if there’s leftover in my envelope at the end of the month?

This is the best problem to have. Who doesn’t love extra money?

This is what we did.

In our little file folder of cash envelope sections, we created a “rollover” section for each envelope. If you use actual envelopes, make a “rollover” envelope for each category.

We had a food envelope, and a food rollover. Gas and gas rollover.

If we had extra money at the end of the month, we stashed it away in the “rollover” tab for a rainy day.

This was SOOOO helpful!

If we needed to stock up on staple food items like oatmeal, spices, baking supplies, we took money from Food Rollover to cover the costs. That way it didn’t affect our normal monthly budget.

Twice we paid for new tires from our Gas Rollover. 

It felt like free money. Plus these bigger expenses didn’t hurt our budget at all since we already had the money accounted for in previous monthly budgets.

Of course you can use extra money to pay off debt, invest, or put into savings or retirement too. 

There are a lot of options, but when we first got started, this worked great for us. Now we add extra money to our savings account.

Should I add an envelope for Miscellaneous expenses?

Great question here. We didn’t, but I think it’s a smart idea to safeguard your budget. 

If you put $50 in a miscellaneous envelope, you can cover a few extra expenses that might pop up. And if you plan for it in your budget, it is one more way to create freedom in your budget if you feel restricted.

Plus it can help offset if other envelopes run out of money before the end of the month. The alternative is you just don’t get to spend more if you run out of money in your envelope. 

It’s good to have a safety net when you first get started. 

If you don’t use it for a few months in a row, maybe you can get rid of the category and use the money to pay off debt instead.

What about bills and expenses I can’t pay for with cash?

Of course there are expenses that cash envelopes won’t work for. It’s hard to pay your mortgage or your cell phone bill with cash.

For these, set up automatic payments or use online bill pay to make the process as smooth as possible. 

Like with cash envelopes, the important part is planning ahead so you know you have money to pay for all of your bills.

Cash Envelope Apps for People Who Hate Carrying Cash

For us, cash envelopes introduced us to new budgeting habits that were crucial to becoming debt free.

We made a choice to pay cash for everything we could, and stuck to that choice for several years.

But I know a lot of people who hate the idea of carrying cash around with them, or would rather use a debit card since it’s linked to their account. 

Luckily there are digital options for Dave Ramsey cash envelopes too. I haven’t used any of these products, but I know people who do and found reviews from people I trust. 

Some of these digital cash envelope options are free while others are paid. If you plan to do the digital route, do your homework and find an option that matches your goals. And remember, it might be a good investment to pay for a tool that can change your life.

Qube Money (Cashless Envelopes)

When I learned about Qube Money I was blown away. It’s basically cash envelopes but without the envelopes. 

Qube Money is an online bank. Within your account, you can set up categories just like you would with real cash envelopes. Except it’s all digital.

It works with an app and a specific debit card. In the app, you create Qubes (digital envelopes) and allocate your money to your specific budget categories.

Here are a few examples of Qubes you can set up:

• Groceries
• Eating out
• Kid’s allowance
• Gas
• Clothes

But really your Qubes can be ANY CATEGORY you choose. That’s the beauty of it.

After you create your Qube budget categories, you set up your budget and allocate your money to your Qubes. 

It’s also engineered so you’re the only one who can use it, so you know your money is safe and secure.

Your Qube Money card defaults to $0 in each Qube budget category. This also helps prevent theft.

When you want to spend money, go into the app and transfer money to your Qube card. The money transfers onto your debit card, ready to be swiped.

If you don’t transfer the money onto your debit card, you can’t spend the money. And after you swipe your card, any leftover money goes back to your Qube in the app. Card balance goes back down to $0.

It forces you to be intentional, aware of your budget, and limits your spending to what you put in your digital envelope.

And if you have other family members on the account, they’ll get a notification when the transaction takes place. One more way to help everyone be transparent and accountable with your budget.

And so your kids can’t run up a huge bill! 🙂

How freaking cool is that!? 

Plus because you’re being intentional with your spending, you’ll save more money and saving money is just fun!

Learn more by heading to Qube Money today (after you read the rest of this article of course!).

Mvelopes

First cool thing I noticed when I went to their website is you get a one month FREE Trial.

I love free things, especially when that free thing can help me save money and manage my spending better.

Mvelopes is designed to help you manage your spending with its digital envelopes, but it also teaches you about budgeting too. 

After you set up your mvelopes, you’re ready to spend. Every time you spend money, it’s deducted from your envelope automatically. 

For a full review, head over to PT Money.

Everydollar

Everydollar is straight from Dave Ramsey. It was built by his organization around Dave Ramsey money principles, Dave Ramsey 7 Baby Steps, and using a debt snowball spreadsheet. 

It uses a zero-based budgeting method, which I freaking LOVE! That’s how we’ve been budgeting since 2013.

Zero-based budgeting means that at the end of the month, your income – expenses = ZERO. That doesn’t mean that you spend every single dollar you make. Instead, you PLAN out every dollar you make so that it has a place to go.

For example, if your expenses are less than your income, the extra money goes to savings, paying off debt, extra charity, home improvement projects. Whatever you want really. As long as you mark it in your budget.

You put your budget categories and monthly budgets in the app and it tracks your spending for you. 

For a full review, head to Wallet Hacks by Jim Wang. 

Are You Ready to Start Using Cash Envelopes and Change Your Life?

I know it’s a bold statement to think that something so simple can change your life, but it’s true.

We went from level zero budgeters to paying off $100,000 of debt in 5 years. Dave Ramsey cash envelopes helped us get started, stay on track, and for the first time ever, get excited about budgeting.

The money we saved using cash envelopes helped us pay off debt faster (especially when paired with a real budget and debt snowball spreadsheet).

Most importantly we believed in ourselves and believed in the system we used.

We liked it, so we used it more.

Are you ready to dive into cash envelopes and the wide world of budgeting? 

If you want a budget spreadsheet to help you track your spending, go to my Etsy shop and buy one for $5. It’s a great investment, and can change your financial future. Trust me, it did for us.