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I’ve mentioned Dave Ramsey’s envelope system in a lot of posts, but haven’t had the chance to really dive into how it works. And if the cash envelope system for budgeting works for everyone.
The real question is, “does it really save your budget?”.
Is it really necessary to go to the bank every paycheck, withdraw cash, and use that instead of your debit card? Because it seems like a hassle.
For the nerd in me, it was a slight hassle to get to the bank every other Saturday morning after payday. But I also kind of found it fun to divvy up the money and stick to it (I’m weird).
But does it really save your budget?
What is the envelope system for budgeting?
Before we can dive into what it does for your budget, we need to talk about how it works.
The cash envelope system is a physical way of keeping your budget. Some of the budget categories in however you keep your budget (app, spreadsheet, or paper and pencil) are different envelopes in your system.
For example: if you have categories for groceries, entertainment, and coffee, you will have cash envelopes for all three of those categories separately.
When you write out your budget for the month, you will allocate a certain amount of money for each category. Then, after each payday, head to the bank to take out the cash you need. Divvy that cash up into their respective categories, then only use the cash you allocated for each thing.
So if you only allocated $15 for coffee for one pay period, you take $15 out of your bank account, place it in that envelope, and only pull from there to get your coffee.
When the money’s out, it’s out.
What the cash envelope system works for, and what it doesn’t
The envelope system works great for things that you physically go to a counter to pay for.
So I mentioned groceries, entertainment, and coffee previously. Those are all things you go to a counter to pay someone for.
Things like your electricity and gas bill, streaming services, and loan payments are, most likely, things that you pay online.
In those cases, it doesn’t make sense to use the envelope system, since you likely pay online with your debit card (of course, these should still be allocated for in your budget!).
So, does the cash envelope system really save your budget?
For us, it absolutely saved our budget. Hands down, no contest.
The envelope system was a type of accountability that we desperately needed. You see, using our debit card for things that can vary in price (groceries) gave us permission to spend that extra money if we wanted to.
That’s because the money for all of our categories was in one spot, so it “felt” like we had more money.
That really hurt our budget. By the time we realized it, we had overspent on one category and ended up penniless in another category. And for some reason, we continued to let it happen.
I have to say it: this is a halfway approach to budgeting. And with budgeting, you either need to be all in, or all out.
It doesn’t work in between.
If you are able to completely respect the budget allocations you set for yourself while keeping everything in your bank account to draw from, then more power to you. That’s a lot easier said than done, and almost impossible for some (like us).
For most people that have any sort of impulse (and impulse can range from a $1 pack of gum in the checkout line to a $250 and beyond purchase), the envelope system would be a lifesaver.
How do you start a cash envelope system?
When we first started, I took mailing envelopes, wrote the category on the front, punched holes in each one, and stuck them in a three-ring binder. It worked for our purposes, but the paper envelopes did give out pretty quickly.
There are a ton of options out there to help organize your finances. Everything from tear-resistant envelopes with a plastic case, to color-coordinated and comes with a pouch (my personal favorite!), to an actual wallet with envelopes embedded (my Honey browser extension said it’s currently at a lower price!), to the more budget-friendly options (this and this).
I think there’s something out there for everyone!
Once you have your envelope system, it’s all about creating your budget, taking out cash, and using the envelope system to stick with your budget.
So do I just use cash envelopes forever?
For us, we had to use the envelope system while we were paying off debt. It was a time when we had to be extremely strict and frugal. We cut everything out we could. And when we didn’t cut things out, we went down to bare essentials.
We had to work hard to get out of debt. And we wouldn’t have done it any other way.
Once we were out of debt, we loosened the purse strings a little. We allowed ourselves to spend a little more at the grocery store and added entertainment back in.
But we still used the envelope system.
Now that we’ve been sticking to a budget for several years and feel very accustomed to it, it’s easier to stick to our budget categories. We’re more mindful of purchases, and know when too much is too much.
So we’ve allowed ourselves to use our debit card for common things like gas and groceries.
I think we’ve relaxed things a little also because of what the experience of paying off our debt did to our psyche.
I’m in no way comparing our debt payoff to the Great Depression, but let’s think about the people who went through that for a second. We know some folks who are older and had parents that went through the Great Depression. And from having to get by on almost nothing at all, reusing whatever they could, and repurposing things, a lot of those values were pushed onto their children.
And to this day, the people we know that were the children of people who went through the Great Depression still have those values instilled in them. They didn’t even go through it, but the values stuck!
That is an extreme example, but can still apply.
We got by on as little as possible. And even though it was for a finite amount of time, it still changed something in our psyche that I am forever grateful for. We really do think twice about frivolous shopping, whereas we absolutely did not before.
All of this to say: no. You definitely do not have to continue the envelope system forever.
We kept it around long enough for it to change the way we thought about spending money.
We occasionally still use cash for things and save up that way, and might even go back to that way of managing our money again. But for now, we are not using the envelope system for our main budgeting categories.
That’s how cash envelopes can save your budget!
The envelope system works great for managing your budget and really saved our finances. I bet they’re at least worth a shot on your own finances.
Have you tried the cash envelope system for budgeting before? If so, did it work out for you? What were your main envelope system categories?
I’d love to hear about it in the comments!