How to Set Up Your Own Cash Envelope System

By Carrie Sullivan

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Managing your finances can be difficult. When you don’t manage your finances effectively, you find yourself spending more than you should and then not having enough money for the next month, let alone for things like emergencies or unexpected expenses! Sometimes it feels like you’re juggling too many things at once, and the stress starts to become overwhelming. 

There are plenty of great apps for budgeting, but sometimes it’s nice to have a tangible system that your hands can hold onto, and you can visibly see in real-time. This blog post will teach you how to set up your own cash envelope system to help track your money, prevent overspending, and keep you more informed to be better prepared financially.  


What is the Cash Envelope System?

How Does It Work?

How To Set Up Your Own Cash Envelope System

Tips For Using the Cash Envelope System Successfully

Ways to Make It Easier for Yourself Using the Cash Envelope System

Why I Love My Cash Envelope System!

Here’s a video on how I use my own Cash Envelope System! (You can get the printables here)

What Is the Cash Envelope System?  

A cash envelope system is a physical, visual budgeting tool to help you track your money, prevent overspending, and take control of your money. It’s a way to accurately track your variable expenses that vary from month to month, such as transportation, groceries, dining out, and clothing. Your fixed expenses are recurring expenses that remain constant each month such as, your mortgage or rent, cable bill, cell phone, and other bills, and these can be put on autopay from your checking account because they don’t change from month to month

Using the cash envelope system takes persistence, control, self-discipline, and commitment, but the reward of having complete control over your finances makes it all worth it!

How Does It Work?

Based on your income and expenses, it works by budgeting how much to spend each month (or pay period) for each budget category. Then, using the envelopes, labeled by category, add the correct amount of cash you designated for each category to each envelope (i.e., $300 for groceries and $100 for transportation).  

At the beginning of each month, write down your total income for the month. Subtract your monthly fixed costs and debt payments and assign the remaining balance to your cash budget envelope categories.  

For example:

Total Combined Bimonthly Income: $4,000 (couples combined income per pay period)
Less Monthly Fixed Costs: $2,500 (these could be put on autopay from your checking account)
Equals Remaining Balance: $1,500 (monthly variable expenses for cash envelopes)
Total Remaining Balance: $1,500 (withdraw from bank when the month’s 1st paycheck is deposited)

You’re now going to assign an amount for each category that you will use, and subtract it from that total remaining balance ($1,500)!

  • Groceries: $ 500
  • Transportation: $ 250
  • Beauty/Grooming: $ 150
  • Clothing: $ 100
  • Dining Out: $ 150
  • Babysitter: $ 100
  • Her Fun Money: $ 125
  • His Fun Money: $ 125

Total Remaining Balance: $ 0

Once you have assigned all your dollars to a budget category and your first paycheck of the month has been deposited, go to your bank, and withdraw the total cash amount (in this example, it would be $1,500). Put the correct cash amounts assigned to each category in the corresponding envelopes.

Every time you purchase something from a category in your cash envelope system, use the cash from that envelope, and when the cash is gone, no more spending in that category until your next payday!

This system is designed to help you spend within your means, become more aware of how much you are spending. It also teaches you how accurate you are with your budget and how to improve your accuracy based on your spending. If you find out you always have cash leftover in a category, then budget less for that category. If you find you are always running out of cash in a category, then budget more for that category.

How to Set Up Your Own Cash Envelope System

Setting up your cash envelope system is straightforward. Here is a breakdown of everything you will need and the steps involved to create your own cash envelope system:

What Do You Need for The Cash Envelope System?

Below is a list of common but not exhaustive items people use when setting up their envelope system. The cash envelope system is very popular, and there are hundreds of options to choose from. You certainly do not need everything on the list, but you could also add more to the list, depending on your preference and financial situation.  

Keep in mind the items on the list can usually be found for a reasonably low price. However, everybody’s financial situation is different. If you are really strapped for cash and don’t want to spend money on a fancy budget envelope system, you could get by with plain white envelopes at a bare minimum.  

Common Items to Create Your Own Cash Envelope System

Accessories For the Cash Envelope System

Steps to Create Your Cash Envelope System

Make a list of budget categories, for example:

  • Groceries Clothing
  • Dining Out
  • Fun Money
  • Transportation
  • Entertainment
  • Beauty/Grooming
  • Savings
  1. Gather enough envelopes for each category and label each one by category.  
  2. Add a tracker to each envelope to track your beginning balances, expenses, and ending balance.
  3. Put your envelopes in a binder.

Tips for Using the Cash Envelope System Successfully

Problem:  I get to the store and realize I don’t have my cash envelopes.

Solution:  Go home and get it (remember what I said earlier about self-discipline and control)! It takes time, control, and self-discipline, to build new habits and change the way you have always done something. If you aren’t willing and committed to being inconvenienced occasionally, ask yourself, “how is the way I have always handled my finances working for me?” If you aren’t willing to try a new approach, you will always get what you’ve always had!

Problem:  I get paid four times a month; I don’t have time to do a budget every week.

Solution:  A big part of budgeting is being honest with yourself. The one excuse I really have trouble believing, for anything, is “I don’t have time.” If you are really being honest, when most of us say, “I don’t have time,” what we really mean is, “I am choosing not to prioritize my time with this.” We all have the same amount of time in the day.

Whether we choose to get up an hour earlier or skip a night of television to work on a priority for us or not is our choice. Just be honest with yourself about why you “don’t have time” to do something. That being said, another alternative to budgeting four times a month is to budget once a month and divide your cash envelopes by four. You will know your total monthly cash amount for each envelope at the beginning of the month when you do your budget. Now, all you have to do is go to the bank each week and withdraw one-quarter of the total monthly budget.

Common Questions About the Cash Envelope System 

What happens if I have money leftover in my cash envelopes at the end of the month?

Suppose you have money left over at the end of the month. In that case, that can mean two things, you either over-calculated your normal monthly spending for that category, or you underspent by exercising the self-discipline of not falling prey to instant gratification or by being a smart shopper and bargain hunter.  

**PRO TIP: Take any leftover money from your cash envelopes at the end of the month and put them in your Savings envelope to build your emergency fund.

Remember, the cash envelope system is a tool to help you better understand your spending habits. In the beginning, you will find you will have categories where you ran out of cash too fast and categories where you have a lot of cash leftover. Adjust your cash levels each month based on what you have left at the end of the month. As you learn more about your spending patterns and trends, you will get better at estimating your spending.  

If I run out of cash in one envelope, can I take money from another envelope?

There are no set hard and fast rules here; it’s your money, and you have the freedom to choose how you spend your money. However, the cash envelope system is a tool to help you align your financial habits with your values and develop the self-discipline to delay instant gratification for long-term fulfillment and freedom. The trick is to set your category amounts close to what you need each month and either end up with a zero balance or set a goal to save some of the money by getting creative with a “No Spend” or “Sales Only” monthly challenge.

What if other family members share some of the same cash envelopes during the month?

You could take the total cash for those shared categories, divide it by the number of family members using it, and give each one their own envelope. For example, if your grocery fund is $400 for the month and you and your partner both go to the grocery store at different times throughout the month, split the grocery category into two envelopes and put $200 in each envelope.

What if I prefer paying for my gas at the pump rather than going inside to pay?

You could keep the gas envelope and deduct your gas expenses on the money tracker in your gas envelope. 

What if I do most of my shopping online?

As I mentioned earlier in this post, cash envelopes are designed to help you control your money and prevent overspending. If you are purchasing items online from your cash envelope categories, leave the money in your bank account but still track the expenses on the money tracker in your cash envelope.

**PRO TIP: Keep “prop” money in the envelope to get the physical feeling of removing the cash from the envelope and the visual picture of how much money is left for the month.

What if I’m not comfortable carrying all that cash with me?

A big part of budgeting is planning. At the beginning of each month, you are making a plan for your money, and part of that process could be planning your shopping days. When you know ahead of time that you will be going to the grocery store or a department store, you can grab the envelope(s) you will need for that day and leave the rest in your binder at home.

You do have to be cautious when you carry cash on you, but you would be just as careful with your purse or wallet full of bank and credit cards. So, just be conscious and aware of your surroundings and where you keep your cash.

Ways to Make It Easier for Yourself Using the Cash Envelope System

Everyone’s values and financial situation are different. What you value as important and maybe even a need, someone else may view as a want and less valuable. The cash envelope system puts you in control of your money. It offers you the freedom to choose the categories and amounts in which you designate your money.  

It takes a good three months to really have a good grasp on your financial habits and your budget. In the beginning, you are going to get it wrong over and over again. Don’t let that stop you! Give yourself some grace and be proud of yourself for taking the hard road and accepting change. Your future self will thank you for it!    

Why I love my cash envelope system! 

The cash envelope system completely changed how my husband and I think about money, treat money, and manage money. It shifted our scarcity mindset to a growth mindset. Managing your mindset is the simplest path to managing your money, and the cash envelope system was an important tool in helping us build a growth mindset. Our relationship grew stronger. We learned a lot about our core values and what was important to us. We became better role models to our children and taught them a lot about money.  

Physically touching and seeing the money tugged at our emotions. It changed our attitude about money, and our money habits started aligning with our values. We went from never looking at our spending to knowing where every dollar was going. We quickly felt the empowerment of having the ultimate control over our money. Was it hard at first? Absolutely, but it was well worth the reward of being in control of our finances and making more informed decisions. It helped us build solid financial habits and make more informed decisions with our money!     

The cash envelope system is a great way to control your spending, but it does require a little bit of work. It’s important to set up the right categories and keep track of what you spend on each one. Some people find this method difficult at first, but anything new will be difficult in the beginning until you learn it through consistency and repetition. If you think it’s too much work, ask yourself, “how is the system I am currently using working for me”? If what you are doing or not doing right now is not working, the only way to get a different outcome is to try something new!  

Give the cash envelope system a try, and if you stick with it long enough, you will soon be a pro at it and know exactly where every dollar goes! Now it’s your turn! Share what you think are some benefits or drawbacks of having a cash envelope system OR share what’s in your wallet right now!

About Carrie:

Family Money Mindset Coach with love and passion for family values and life-long learning.

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