How to use Dave Ramsey’s cash envelope system to stick to your budget and control your spending. By starting with my free printable budget, you can determine which categories you need so the cash envelope system works perfectly for you month after month!
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If I had to name one thing, just ONE thing, that completely changed our finances for the better, it would be Dave Ramsey’s cash envelope system.
Hands down, switching to the cash envelope system was the turning point that took us from wasting our money to having complete control over it. Only after making the switch did we realize just how much money we had been wasting before!
Why You Should Use the Cash Envelope System to Manage Your Money
I’ve been a huge Dave Ramsey fan for years, so it’s a little bit embarrassing that it took me so long to jump on board with his cash envelope system. Honestly, I’m just hard-headed. Despite the compelling evidence I heard over and over from Dave, I put off using the cash envelope system longer than I should have.
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That compelling evidence? Let me tell you about it.
Did you know that paying with cash activates the pain centers of our brain?
It’s true.
MRI studies show that the pain centers are activated when we pay with cash. Unfortunately, that effect doesn’t happen when we swipe a piece of plastic. We feel nothing, so we spend more.
That’s why the cash envelope system works so well. Paying with cash causes us to spend less money because we don’t like the pain of watching it leave our hands.
Once Josh and I finally switched to the cash envelope system, we realized just how true that statement is. We spend so much less when we have to fork over our hard-earned cash!
If you’d like to start using the cash envelope system to control your spending too, then you’re in the right place, my friend. Let’s dive right in!
Cash Envelope System Basics
Before I tell you how to use the cash envelope system, there are a few things you should know.
First, you don’t really use cash for everything.
I’m talking about bills. I don’t take $650 in cash to our mortgage company or $65 to our Internet provider each month. Instead, I pay all of our bills out of our checking account. I pay some bills online and others by writing a physical check from my checkbook.
For almost everything else, I use cash. If I have to walk into a store to buy it, I pay with cash. Some of my cash envelope categories include groceries, restaurants, gifts, clothing, beauty products, pets, and fun money.
Your cash envelope categories may look a little different than mine, but the same concept still applies.
Second, you don’t have to use envelopes if you don’t want to.
Even though it’s called the cash ‘envelope’ system, the latest craze is actually cash clips. Personally, I use a combination of envelopes and clips to make things easier for me. I’ll tell you more about that later.
Once you get the hang of the cash envelope system, you might find that you have a preference for one or the other (or both, like me!).
Third, once the cash is gone, it’s really gone. No more spending from that category, and no credit cards to cushion the blow.
The cash envelope system divides your cash into specific categories such as groceries, restaurants, clothing, gifts, entertainment, etc. Each category has its own envelope, and once you run out of cash in that envelope, that’s it. You’re done spending for that category for that month.
If you absolutely need to buy something, you can dip into another category’s envelope. But the goal is to stay within the budgeted amount as closely as possible.
Fourth, this system works best if you have enough cash to stay one month ahead of schedule.
Here’s what I mean:
It’s much easier to stick to the cash envelope system when you have each category’s envelope fully-funded at the beginning of the month. That means you need to have all that cash withdrawn from your bank account before the month begins so you can sort it out and be ready to go at the beginning of the month.
For example, I withdrew all the cash I would need for April’s envelopes on March 30th. As soon as I got home, I sorted the cash among my envelopes and put them in a safe place so they’d be fully-funded and ready to spend on April 1st.
If you don’t have enough cash sitting in your bank account to withdraw a month’s worth of cash categories, then I recommend having a bare-bones month where you severely cut back your spending in order to save up a month’s worth of cash.
Other people call this concept a “no spend month” or a “rice and beans” month. The basic idea is to cut out ALL unnecessary spending. This might include restaurants, entertainment, clothing, etc. Anything you don’t absolutely need to survive is a good place to cut.
Of course, you still have to pay your bills and feed your family. Other than that, try to save as much money as possible so you can start using the cash envelope system!
If you need help planning a successful no-spend month, I created a no-spend month planner to make the process easier. You can get a limited-time discount on The No-Spend Month Planner here!
How to Use the Cash Envelope System
So now that you have an idea of how the cash envelope system works, let’s start the process from the beginning!
Start with a Budget
First, you’re going to make a budget. You can get my pretty printable budget form here.
If you’re new to budgeting and need some in-depth instructions for how to budget correctly (i.e. by creating a zero-based budget), be sure to check out this post:
How to Create a Budget When You Have No Idea Where to Start
Since you’ll withdraw your cash before the month begins, you need to get a head start on your budget. I typically create the next month’s budget near the end of the current month so I know how much cash I need to withdraw.
For example, I made April’s budget during the last week of March so I would know how much cash to withdraw on March 30th.
Add Up Your Cash Categories
After you create your budget, add up the spending categories where you plan to use cash. These might include groceries, restaurants, medicine, doctor visits, clothing, entertainment, pets, beauty products, toiletries, haircuts, home goods, pocket money (or “fun” money), gifts, and baby/kid supplies.
Once you know the total amount of money you’ll need to fund your cash envelopes, determine how much of each denomination you’ll need.
For example, if your pocket money, clothing, and home goods categories are $25 each, then you’ll need some $5 bills. Also, if you leave tips at restaurants, you may want to have a few $1 bills for your restaurant envelope.
To make things easier on yourself and your bank teller, you can write down how much of each denomination you want. I typically write out a list very similar to this:
Withdraw Your Cash
Take your list with you to your financial institution and withdraw your cash.
Divide the Cash Among Your Envelopes
For this step, you’ll need an envelope for each of your cash categories. I prefer the 6 1/2″ x 3 5/8″ size envelopes because they’re perfect for cash.
Be sure to write the category name on the front of your envelope so you know which is which.
Once you divide your cash among the envelopes, put them in a box or other container and store it someplace safe. You’ll keep the bulk of your cash there so you aren’t walking around with a ton of cash in your purse.
Seriously, don’t keep all of your cash in your purse. It just isn’t a good idea. 🙂
If you don’t want to use a container for your envelopes, you can clip the envelopes together instead. That’s what I do so I can hide them in a more secretive place.
Spend!
Before You Leave Home
Before you leave your house to go shopping, get however much cash you think you’ll need out of your envelopes and put it in your purse.
You have two options here. You can either put your envelopes directly in your purse, or you can move the money from an envelope to a corresponding cash clip. Personally, I prefer cash clips because they take up less space in my wallet. See?
I have a cash clip that corresponds to every envelope in my cash envelope system. These kinds of clips are nice because you can write the category name on the edge like this:
I only have a handful of these though, so I use colored paper clips for my remaining categories. For example, I have a green paper clip for groceries and a pink one for my fun money.
If you’d like to watch a video that shows you how to set up the cash clip system in your wallet, this video has a great demonstration:
At the Store
When you’re ready to check out at the store, pay with cash from the appropriate cash clip or envelope. Whatever cash you receive as change can go back into the clip or envelope.
If you’re using cash clips, you can’t really keep your coins separated by category unless you want to drive yourself crazy. Personally, I just put my coins in a zippered pouch on the side of my wallet and use them as needed.
When you use the cash envelope system at stores such as Walmart or Target where you can buy items from multiple categories (toiletries, groceries, pets, home goods, etc.), you have to get a little creative at checkout.
I quickly learned that the self-checkout lanes are my best friend when using the cash envelope system. I can ring up a separate transaction for each category in order to keep my cash separated.
For example, I ring up my pet supplies and pay cash out of my pets clip. Then I ring up my household goods and pay for them out of my home clip. I do this with all of my categories until I’ve paid for everything.
It sounds like a lot of work, but doing it this way really doesn’t take long once you get the hang of it. 🙂
Final Thoughts on Using the Cash Envelope System
So that’s the cash envelope system! It may take a time or two for you to develop your rhythm, but it’s a simple system at its core. And the best part is that it actually works!
Seriously, I couldn’t believe how much money we saved by switching to this system. I don’t think we’ll be going back to our old ways any time soon!
To recap, in order to successfully use the cash envelope system, you just need to follow five simple steps. Start with a budget, add up your cash categories, withdraw your cash, divide the cash among your envelopes, and spend! That’s it.
Other Money Management Articles You May Enjoy
- How to Save Money Without Feeling Deprived
- 4 Reasons You Need an Emergency Fund
- How to Build an Emergency Fund: 3 Solid Strategies to Get You There Quickly
- The Best Financial Advice I Ever Received
- How to Spend Less Money When Your Spending is Out of Control
- 7 Free or Cheap Ways to Exercise on a Budget
- How to Know Which Financial Advice to Follow
- No-Spend Month Results: What We Learned from Our First No-Spend Challenge
What about you? Have you started using the cash envelope system yet?
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If you have money left over at the end of the month what do you typically do with it?
Hi, Missy! For me, it really all depends on which cash envelopes have money left over in them at the end of the month. Depending on the category, I’ll either let the money stay in the envelope or take it out and put it towards our debt repayment.
Take my clothes cash envelope, for example. That’s one that I would usually just leave the unused cash in it at the end of the month. Since I don’t buy clothes every month, I let the cash build up so when I am ready to buy clothes, I have plenty of cash to cover whatever I need to buy. In this way, I’m building a “savings account” of sorts for that particular category.
However, if I consistently have a lot of cash left over in my basic necessities cash envelopes (think groceries, household products, toiletry items, etc.), then I reassess my budget and lower the amounts I allot for those categories so I can put that extra money toward something else, like paying off debt.
I hope this helps! 🙂
Thanks for the detailed post. My struggle with this is that I do a lot of my grocery and household item shopping online…for instance- pet care, healthcare, and baby items I find the best deals on Amazon. I do grocery pick-up at Walmart to save from buying non-needed items and pay online for that, too. Do you have any tips/tricks for doing this while staying true to the “envelope” method? Thanks so much!
Hi, Michelle! I have some things that I buy online too. In those instances, I move the cash from its relevant envelope into another envelope labeled “spent.” For example, when I buy cat food online, I take however much it cost out of my “pets” envelope and move it to the “spent” envelope. Now, how you handle the “spent” envelope is totally up to you. I know some people take that money and re-deposit it into their checking account periodically throughout the month or wait until the end of the month to re-deposit it. It really depends on when you need that money back in your checking account to cover your online purchases.
Managing money is a lot of work no matter how you slice it, but it can turn into even more work when you throw online shopping into the mix. Definitely give this method a try, but if you find that doing all of this money-shuffling is just too tedious, you might like a cashless envelope system better. Just google “cashless envelope system” to see how other people do it. I hope this helps! 🙂
How do I figure how much to put in each envelope each pay period?
Hi, Michelle! It depends on how often you get paid. If you get paid twice a month or bi-weekly (which seems pretty standard), then you would divide your total monthly cash amount by 2 and withdraw that amount each pay period. Then, each time you withdraw the cash, you would distribute it among your envelopes. For example, if you know you’ll need $600 total for all of your cash envelopes for the entire month, then you would withdraw $300 when you receive the first paycheck of the month and sort that amount among your envelopes. Then you would withdraw the remaining $300 when you receive the second paycheck of the month and sort that amount among your envelopes again. And as for the actual amounts you’d put in each envelope, I would just put in half of each envelope’s total monthly allowance each time you get paid.
Did that answer your question? It makes sense in my head, but if you need more clarification, just let me know. 🙂
My question is how much percentage should we give ourselves for pets, spending money, food, etc?
Hi, Jenny! I don’t personally use budget percentages, but Dave Ramsey recommends the following guidelines: 10% giving, 10% saving, 10-15% food, 5-10% utilities, 25% housing, 10% transportation, 5-10% health, 10-25% insurance, 5-10% recreation, 5-10% personal spending, and 5-10% miscellaneous.
Of course, you can always adjust these percentages to fit your particular needs. I hope this helps you determine how much you should allot for your cash envelopes! 🙂