How to Use a Cash Envelope System & How Our Family Budgets

Using cash is an important part of controlling your spending. It’s not only a system for people trying to get out of debt, but it’s also for everyone because it really makes you think more about your spending.

A cash budget never lets you overspend because once the money is gone, it’s gone. In order to make this work, stop using credit cards and stash the credit cards where it’s hard to get to them. You could also place your credit cards in a Ziploc bag and freeze them in water.

WHAT IS THE CASH ENVELOPE SYSTEM?

The cash envelope system divides your spending into small categories or budgets. And each category has its own envelope to help you manage your money better and help you intentionally think about how you’re spending your money. Having to hand cash to a cashier really does make you think twice about impulse buys. And setting aside money in an envelope for larger expenses helps relieve the burden when the bill comes due.

To begin using a cash envelope system, start by making a list of all your expenses and then decide which categories to make cash only. With your monthly bills, you can continue to have those deducted from your bank account. Here is a list of cash only categories you could have:

Groceries
Clothing
Eating Out
Entertainment
Hair Cuts/ Beauty
Doctor and Dentist Visits/Medicine
Miscellaneous Spending
Home Repairs
Vacations
Christmas
Car Insurance/Other Insurance

HOW MUCH CASH TO TAKE OUT?

In order to determine how much cash you need to take out of each paycheck, take the total monthly amount for each category and divide it by two if you get paid every two weeks or divide it by four weeks if you get paid weekly. For instance, we have a monthly grocery budget of $400, and we get paid twice a month. If I divide $400 by two that’s $200 that we take out per pay check to use on groceries.

Additionally, break the cash down into weekly spending. For instance, if I pull $200 from each paycheck for two weeks of groceries and if I were to go to the store weekly, then I would only allot myself $100 per week to spend at the grocery store. That way I still have money to spend on groceries each week and I won’t come up short.

Here is another example. If your car insurance is $700 per year and you only receive the bill once a year, then in order to determine how much money to take out each paycheck, divide $700 by 12 months, which comes out to be about $58 per month. If you get paid twice a month, then you divide the $58 by two, which means you need to take out $29 per paycheck and set it aside in an envelope or bank account so you have the money to pay for car insurance when it comes due.

Once you decide the categories and determine how much cash will go into each envelope, then go to the bank and withdraw the cash each time you deposit your paycheck. Then place the cash in each category envelope. I don’t use anything fancy, just some blank envelopes that are located by my desk, and I write the category on the outside of the envelope.

HOW TO USE THE CASH ENVELOPE SYSTEM

When you head to the store to go shopping, only take the cash envelope you need. Don’t carry all of the cash envelopes around with you. And every time you make a purchase, be sure to write down on the envelope how much you spend. It’s important to keep track of every single transaction. This will help you stay on track and make you account for everything you spend.

For example, if you go to the grocery store and spend a total of $58.16, then write that amount on the back of the envelope. If you only have $100 to spend on groceries for that week, then also make note on the back of the envelope how much cash you have left for that week, which would be $41.84.

There are also apps you can download to your phone to help you keep track of spending. Check out these 9 budget apps here. Whatever way you decide to keep track of spending, use the option that is the easiest for you to record each transaction. Keeping track of your spending is an important part of using the cash envelope system because it helps you monitor your spending. And once the cash is gone, then you don’t spend any more money.

ONLY USE THE MONEY IN EACH ENVELOPE FOR THAT CATEGORY

This step is very important with the cash envelope system. It can be tempting to use money from one envelope for different expenses, but if you do that then you’ll be short money for other expenses. For instance, if you’ve run out of cash to go out to eat you may be tempted to pull from your grocery cash envelope. However, if you do then you’ll be short money to purchase groceries for that week. It takes self-control and discipline to use the cash in the envelopes for what category you’ve designated it for.

If you have extra money left over that month from some of the cash envelope categories, then use that money to pay down debt. If you’re not in debt, then put that money toward one of your other financial goals or invest it.

HOW TO USE CASH SYSTEM WHEN SHOPPING ONLINE

What if you spend the money online rather than going to the store with cash? You just need to make an adjustment of how to handle it.

Once you determine what you’ll be purchasing online and how much you’ll spend, then you can leave that money in your account rather than taking the cash out. But make sure you have a way of keeping track of that money, whether it is with an envelope titled, “online purchases” or a spreadsheet or app. The other option is to take cash out for the specified category and then if you buy something online then take the cash and deposit the money back into your bank account.

There have been weeks where I am really busy and don’t have time to grocery shop, so I’ll choose the pick-up grocery service at Walmart. Because I’ve already taken out the allotted cash for the groceries, I’ll then take that cash and go deposit it in the bank. There have also been weeks where I know I need to do the grocery pick up from Walmart. If that’s the case then I will leave the money in my account and make note on my spreadsheet of how much I spend.

Using the cash envelope system makes you accountable for your spending and teaches self-control. When you hand over cash for a purchase rather than swiping a card, it makes you think more about about your purchase, if you really need that item, and if you will have enough money later to purchase other items you need. And when using a cash envelope system, when the cash is gone, then it’s gone. You are done spending and you have to make due until the next paycheck when you can place more cash in your envelopes

HOW OUR FAMILY USES THE CASH ENVELOPE SYSTEM

How we budget and do the envelope system is a little different than what most people do. In this fast-paced world of technology where everything is online, I actually like to use a spreadsheet and cash envelope method best for budgeting.

There are many ways to keep track of bills and to pay expenses, such as writing it down on paper, using Google or Excel spreadsheet, or downloading a budget app. For those of you who need help to get your finances in order, my friend, Jordan Page of FunCheaporFree.com has an amazing budgeting program, called the Budget Boot Camp, where she shares her budgeting tips, including how she has seven bank accounts as part of her budget. Head over here to learn more about Budget Boot Camp, and if you use the code SCBC, you’ll get 10% off your order.

Everyone is different and you need to find what way is the best method for you and what makes the most sense when doing your personal finances. The system I’m about to explain is what works for us. We live off one moderate income, we don’t have any debt, we have 4 months of money saved up that could be used for expenses if needed, we are putting money away for retirement, and we are on track to pay off our mortgage in two years.

Here is how we budget and do the envelope system:

All the bills we receive in the mail are placed in a filing stacking tray by my computer. For those bills we don’t receive in the mail and instead get an email or text saying the bill is ready to be paid, then I use a piece of cardstock (similar to the photo below) to write what the bill is and by what date every month it needs to be paid. I keep these cardstock papers in my filing stacking tray the entire year. This helps me to make sure I account for the bill when it’s time to pay it.

Every two weeks when we get paid is when we review our budget, determine what bills need to be paid, how much cash we need to place into our envelopes, and if there is a bill coming up in the next few months that we need to make sure we are aware of and to save up for it. Here are the budget categories that we regularly have. I use an Excel spreadsheet (see the photo below) to keep track of all the categories below.

Tithing
- We give 10% of our income to our church. God is a very central part of our home, and this principle is very important to us, so we always make sure this gets paid first before anything else.
Mortgage and Utilities
- These are our bills that come regularly every month. They include the mortgage, electricity, heating/gas, water/sewer, garbage, transportation/fuel, cell-phone and Internet. We make sure these get paid next, then we look at what additional money we have for all the other items below.
Extra mortgage
- Since we want to pay off our house more quickly, we set aside money to pay extra toward our mortgage. I’ll leave the money in the checking account, but make note of how much we can pay toward extra mortgage that month. Also, if I sell items that we have around the house that we no longer use then I’ll take that cash put it in an envelope titled, “Extra mortgage”. The next time I pay the mortgage bill, I’ll deposit this extra cash into our checking and add it as additional principal to our bill.
Groceries
- We have a grocery budget of $400 per month. Since we get paid every two weeks, we take out $200 cash from each paycheck for groceries. I go grocery shopping once every two weeks. Having cash for groceries helps me to stay within my budget because I think twice before I add something to my cart. I want to have enough money and don’t want to go over budget. It also helps me stay within budget because once the money is gone, then it’s gone. I don’t go to the grocery store anymore and I make due with what I have at home.
Car Insurance, Christmas, Vacation, Home Repair
- Every month we take cash out of our paycheck and set it aside in envelopes for these expenses. I created cardstock cards (see photo below) for each of these expenses, and I’ll fill in a box on the card for that month so I know that we took cash out for the expense and placed it in our envelopes.

Medical Expenses
- We’ve been lucky that we have good health insurance and our family has been really healthy. But we do try to set aside money if we know we have upcoming dental appointments, prescriptions that need filled or ordering contacts for me once a year.
Family & Other Activities
- For us, this includes paying for preschool, dance and piano. These extracurricular activities are something we want our kids to be able to do, and we can afford it at this time. I have cardstock cards that say “preschool”, “dance” and “piano” in my filing tray so I remember to pay them at the beginning of each month.
- If money is needed for clothing, gifts, haircuts, school lunch money, etc., we try to plan ahead and put money aside. A few months before school starts in August, we set aside money to be able to pick up school clothes for our kids.
Play, Fun, Eat Out money
- We take out cash for family activities and eating out. Something we enjoy doing as a family is eating out once a week, so we set aside money to do that. I think through what we will be doing over the next two weeks and how much is within our budget to take out for these types of activities.
Savings
- Depending on how much our bills are for the month depends on how much we transfer to our savings. We have our 4 months of savings already, and since we want to pay off our house faster, we are using more of our income to put toward the principal on our mortgage. But we do try to continue to save money each month, even if it’s only $20 or $50. Remember even $20 here and there when placed in savings starts to add up.

After I write down what we need to pay, and how much cash to take out of the bank, then my husband and I sit down for a few minutes and review where the money is going. I then use a spreadsheet to add in these numbers to keep track of our monthly expenses.

We will then deposit our check and take out cash for groceries, eat out/play money, Christmas, car insurance, vacation, and home repair. Except for the grocery money where we take out $200 from every paycheck, with the other items listed we only take out cash every other paycheck to place in the envelopes.

There are always more things we want to save for than money we have, but we keep prioritizing what is the most important things to save for and what our financial goals are. Currently the financial goal we want to accomplish the most is to get our house paid off. We aren’t always able to put cash in each envelope every month. Sometimes it’s every other month. And sometimes it’s only $20 for some envelopes. But what’s important is to keep trying and keep refocusing every month. I know it can be easy to get off track, but try to re-evaluate what you want to accomplish and get back on track again.

Do you have any tips to budgeting or using a cash envelope system?