The Cash Envelope System for Beginners

When looking at the cash envelope system for beginners, it’s good to get an overview. What are the key steps, why use the system, and what are the main challenges? The cash envelope system has been around for generations. Cash stuffing is a more recent name for it, but the principles remain the same.

The envelope method, as originally created, uses cash for all purchases. If you get paid our income in cash, you divide the cash up into budget categories. If you get paid you income into a bank account, you go to the bank and draw the money out in cash.

As we’ll see later, you can adapt the envelope system to include digital (non-cash) spending. This has both advantages and disadvantages.

The Main Steps in the Cash Envelope System

Step 1 You make an overall budget. The cash envelope system is a method of personal budgeting.
Step 2 You decide detailed budget categories, including the budgeted amount for each one.
Step 3 You get some envelopes and label each one as a separate budget category.
Step 4 When you receive income, you distribute it (in cash) between your envelopes according to your budget.
Step 5 You restrict the spending for each budget category to the cash you placed in that category’s envelope.
Step 6 Which means you do not reach for a credit card when you want to buy something, and you don’t have the cash.
Step 7 Which, in turn, means that you need to build an emergency savings fund as a fallback so you can pay unexpected bills that crop up

Before we get into these steps in more detail, let’s look at the challenges you’ll face.

Why Use Cash Stuffing?

The huge advantage of relying on cash for all your spending, and never using credit cards or consumer loans, is that you cannot overspend. If you have $95 in your groceries envelope to last you until your next pay day, you are forced to spend $95 or less.

When does ‘you are forced to spend $95 or less’ mean? This is not about someone else telling you what to do. This is a decision you have made, a commitment to yourself to restrict your spending to your budgeted amounts for each category.

And why would you put these strictures on yourself? Only because it’s a means to an end. You have a dream, a financial goal or life goal you want to achieve. By restricting your spending today, you are saving for a better life tomorrow.

Is it easy? No, definitely not. This is probably not a path you will choose unless you’re really up for it – either because you like the idea, or you dislike the consequences of not budgeting. But it's like a lot of things in life. You might love it!

Advantages and Challenges of the Cash Envelope System for Beginners

The main advantages of using cash are:

It’s difficult to overspend
You become more aware of your spending
You can have fun being creative with the design of your cash envelopes

The main disadvantages are:

Dealing with cash is time consuming and fiddly
You’ll need to draw out cash in specific denominations
Paying some suppliers in cash could be difficult or impossible

This last point is vital if your considering the cash envelope system for beginners. Can you pay your mortgage in cash? Do the stores you want to visit still accept cash? Do some of your suppliers insist on a direct debit.

More generally, how do you deal with regular fixed expenses when using the envelope method?

Set Your Overall Budget

The envelope method uses zero-based-budgeting. When you set a zero-based-budget, you decide how to allocate your income between spending categories. The regular fixed expenses I mentioned just now are often ‘payments you must make’. Even if you like the idea of using cash for your spending, it may be easier to pay these items by bank transfer or direct debit.

You’re not losing anything by using a non-cash method for payments you must make. There is no temptation to pay too much for your insurances, or your mortgage, or (depending on your situation) your home energy bills. Yes, it’s wise to consider whether to cut back on some of this spending, for example by downsizing your home or switching off the heating. But this is different to impulse spending on lifestyle choices.

You will decide detailed categories (food, clothes, holidays, etc) but, whatever you come with, you’ll be covering three main headings:

Payments you must make (like rent, mortgage, minimum debt repayments)
Lifestyle choices (like holidays, eating out, cinema)
Financial freedom (clearing your debts, savings accounts, investments)

Budget Categories

Start by estimating your income for the current month (or other time period, depending on how often your income comes in). Then total up any payments you must make – whether by cash or direct debit. Deduct these payments from your income to leave your ‘spending money’. Note down the various categories where you need or want to buy goods or services. Allocate your total ‘spending money’ between those categories.

Typical categories you’ll need to budget and allocate include:

Food to live
Lifestyle food (including eating out)
Transport
Pharmacy
Pet supplies
Repairs (maybe you’ve set up some sinking funds)
Clothes

Dealing with Unexpected Bills

One thing you can be sure of with personal budgeting is that unexpected bills will crop up. Either you forgot about them (annual subscriptions), or life happens (house repairs). So, you need a fallback system. If you’re determined to live within your means, credit cards are out. So, the best strategy is to build an emergency savings fund.

Digital Envelope System

Finally, if you like the idea of the cash envelope system, but you don’t want to juggle various cash envelopes, it is possible to set up digital budget categories. For example, you may be able to find an online mechanism, such as an App, or a bank that allows you separate your balance into different budget categories: ‘jars’ or ‘spaces’. If you're like me, you may like to follow a system to the letter, in which case you might prefer to go 100% cash. But from a practical viewpoint, some action is much better than no action. Therefore, for a cash envelope system for beginners, I recommend considering digital solutions where appropriate.