Create A Home Budget, Use The Envelope Budgeting System

by Guest Blogger on 2009-09-1320

I have to admit that I’ve never done a cash only budget, but I am going to try it, at least for a week and maybe for a month, to see how it goes. A friend of mine a long time ago relayed that she and her husband put money for various items into different envelopes, and when the money was gone, it was gone. They couldn’t buy anything else until their next payday. Spendthrift me thought that sounded a little strange and wondered how and why they would do this.

Create A Home Budget Using The Envelope Budgeting System

More recently, I discovered talk radio host Dave Ramsey, who often talks about his cash envelope system on the air. Listening to him, I understand the concept better: every paycheck, you put money into different envelopes marked groceries, clothes, entertainment, etc. If you run short in one area, he says it is fine to shift money from one envelope to another. But again, the bottom line is that you can only spend the money in the envelopes and no more. Here’s a graphic of what it looks like, thanks to Money3rd.

envelope budgetEnvelope Budgeting System

Tip: You can certainly create an envelope system by hand, but if you’re looking for software that uses this form of budgeting and money management, you can check out YNAB (You Need A Budget), a desktop budgeting tool which you can order through this link or Mvelopes, an online subscription service which has a 30 day free trial. (you can get a 10% discount off the regular price by visiting this link)

It seems as if more and more people are discovering the benefits of such cash only budgets and these envelope systems, and cash is making a comeback. I find this ironic, given that the projection has been for people to never use cash again (at some point), with the proliferation of credit cards, debit cards and electronic transfer. Taking a closer look, you’ll see that there are some pros and cons to using a cash only system. Here are a few:

Cash Envelope Budgeting System: The Pros

  • This system forces you to make a budget and adhere to it, something that I struggle with. I might start out using envelopes for groceries, gas, clothes, and entertainment (things that are easier to control), while I use my high interest savings account which I’ve just opened as another “envelope” in which to deposit money for semi annual or annual payments such as insurance premiums, property taxes, and the like. If I can only make myself save so much money every month for these bills, then it won’t hurt so much when they come due.
  • Using cash is better than using debit cards. I used to think that they were one and the same, but the plethora of overdraft charges from my debit card has convinced me otherwise. I actually prefer debit cards to credit cards because I can place limits on my spending, but by using cash, I’m also able to avoid unexpected fees. Like most people, I feel that cash is the most attractive option for controlling spending. A debit card is still plastic, and when using one, you are still more likely to spend more money than you would with cold, hard cash.

Cash Only? The Cons

  • A cash only system may not work well for emergencies or unexpected expenses, so establishing a separate emergency fund would be a good idea.
  • Using cash can be awkward in a restaurant or bar (or in certain other establishments). Many times I have used cash to pay for a bill in a restaurant or bar, and the server ends up not giving me back any change, assuming that I meant to leave them a large tip. This has been so uncomfortable that I now prefer to use a debit card in this circumstance, so I can indicate how large a tip that I want to leave.
  • It’s almost impossible to use cash to reserve a hotel room or a rental car. Ultimately, you may be able to pay in cash, but most companies want a credit or debit card number to track.

As you can see, while using cash is a great budget trimming idea, there are some situations that highlight the inconveniences of using cash over plastic, and no doubt there are many more scenarios of this kind. Cash is not always practical, and because of the tradeoffs, you may have to be somewhat flexible about using cash alternatives in order to avoid any inconveniences (unless you’re resourceful and can develop a system that works for you: ie. find and work only with merchants or businesses that only accept cash, etc).
Contributing Writer: BEM

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 20 comments… read them below or add one }

Amber Weinberg September 13, 2009 at 1:10 pm

We do the envelope budget without cash. We use a budget program called Snowmint Budget to create envelopes and distribute paychecks digitally. Works just as well without having to carry around a bunch of real envelopes and cash. Best $25 I ever spent. 🙂

Silicon Valley Blogger September 13, 2009 at 1:53 pm

Thanks for the tip Amber! This method seems very effective for many. Personally, I budget very loosely and do a lot of my accounting “in hindsight”. How does this work for me? My expenses are fairly predictable and I keep a large emergency fund. This combination allows me to have some leeway with the budget. While this is my approach, I know a lot of others who swear by the envelope system.

Rachel Blum September 13, 2009 at 2:40 pm

It certainly works, but it’s a major pain for all those places that don’t take cash. (The mortgage company comes to mind. BTW: Wish I had a $400 mortgage 😉

As for the restaurant, simply hand back the money with ‘Could I have change, please’. Your waiter is used to it, and you can give exactly the tip you want.

I’m still torn about using cash or not, because my CC generates miles for me – and since I’m flying to Europe to see my parents quite frequently, I certainly don’t mind the occasional free flight. On the other hand, I *do* spend less when I use cash.

Amber: Thanks for the tip! I’ll give it a look – that might just be the right solution for me.

Steve in MA September 13, 2009 at 9:57 pm

To rent a car without a credit card, you need to give them a bank check for the amount of the hold. Enterprise requires $250 in a bank check as I recall.

After the rental is returned you will receive a check in the mail for the amount of the refund.

I would only do this if I lost my wallet and all my cards (it has happened, and I needed to rent a car, and Enterprise told me this is how to handle it). If you’re traveling, use your credit card for the hotel and such.
My best tip for those who want to use the cash envelope system is that 1) you will end up de-training yourself from thinking of a credit card as a normal means of payment, which is a great benefit and 2) you will spend much less money than you are used to once you are on cash.

To be practical, only use cash envelopes for common expenses : for example, I use 3: all Food envelope, Gas for the car (I actually use my credit card for the “swiping convenience”, then immediately or later that night when I’m home put money from the gas envelope into a “credit card” envelope to pay the credit card bill), and Entertainment. Those are the categories I need strict control over because that’s where I would overspend.

Everything else gets paid by electronic payment from my online banking and a very occasional paper check. September 13, 2009 at 10:10 pm

I found in college and right after college I was pure cash. It made me track my spending alot better. I use credit card. The only thing that stops me from going back is with credit its nice that spending is automatically tracked. I can easily look up what I spent each month. I could do it with notebooks but it would be kind of a pain.

Steve in MA September 13, 2009 at 10:11 pm

One more trick when paying with cash: get in the habit of always saying the amount you are handing the cashier out loud while handing it to them. That way they can’t short-change you as easily.

A (bad example) from my life:

Clerk : “That’s $3.68”

Me (handing over a $20 bill) : “here you go.”

clerk (handing me $6.32); “Ok, here’s your change”

Me: This is change for a 10. I handed you a 20.

Clerk: No, you handed me a 20.

Me “I specifically came in here exactly onew $20 dollar bill ,which I handed to you.”

Clerk: “It was a 10″

Me: (stumped)… walking out.
a) because I sensed that she took the 10 for herself (instead of putting it in the drawer), deliberately shortchanging me. and (b) because I didn’t want to waste two hours of my life getting into a dispute with a clerk, her manager, and the police. .If I had wanted to do that I would have started by telling her ” well, obviously you messed up this transaction. You know to leave the cash on top of the register and you messed up. That’s the first thing you learn when you learn to run a register and you messed it up. I don’t see a bill on top. Look . Do you see one?

Where’s my 10 bucks??!

Clerk: (…..)
Me. Just forget it.

What is your manager’s phone number? And then find the manager’s number and announce that I am now calling the police to make a complaint while in the morning I will contact her manager directly to rectify the situation. Since they have security cameras on 24/7. Which is the tack I would have taken if I had decided it was worth delaying myself and my elderly father over this.


Clerk:It comes to $3.68

Me: (handing over a 20) “Ok, here’s $20.”

The clerk is not going to try and short change you in this case if he or she is dishonest, and if he or she is honest it will draw attention to the amount of the payment so she is less likely to make and absentminded mistake.

Steve in MA September 13, 2009 at 10:15 pm

I have tried all the “virtual envelope systems” and they work great to run the master budget (I use one for that) , but for the most important impulse spending categories of week to week I have found that having actual cash envelopes for them is far far superior to using a “virtual” system.

Tristan Lee September 14, 2009 at 2:03 am

Hello. This post is some good advice, especially for people who spend their money without knowing how much they are spending and also don’t know how to control their money in the long run. I think this method that you provided will teach people how to be more “money aware,” helping them save, and also attract more money in the future. Thank you.

bb September 14, 2009 at 4:53 am

I saw this cash in the envelops system being shown on TV where the financial advisor implemented it to help the couple to manage their monthly budget. It worked for some. An important point is teaching the your children to handle money wisely. In this modern world of credit cards, they may not realize the true value of money. Moreover, in many families, they may not see or have the chance to learn how to handle cash. It is certainly good to let the children handle cash in their weekly budget before they progress onto using credit cards.

Ellen September 14, 2009 at 9:33 am

I’ve always been an advocate of using cash for as many things as you can, then using plastic for those things (like renting a car or hotel room) that you just can’t. Using cash forces me to really feel the loss of that money when I spend it. It’s a lot harder to pass off a handful of bills than it is to swipe a card. Plus, paying in cash you don’t have to worry about nasty overdraft fees from your bank — what you see is what you have.

Paul September 14, 2009 at 9:43 am

For the past 3 months I have been using a spreadsheet version of the envelope budgeting system and it has been working great! It has forced me to spend within my limits and not create money out of thin air (can’t spend what you don’t have). This has led me to be much more confident in my finances and I have less stress in my life.

Bargain babe September 14, 2009 at 2:20 pm

I love that you are trying this but hope you take into account all the financial benefits you are missing out on by not using credit cards. I’ve read your blog for a long time so I know you are very financially savvy, which leads me to assume you have a pretty good credit score and are eligible for credit cards with niiiiice perks.

There is no shortage of cards that offer 1 percent back. Many offer 2-3 percent back on gas and groceries. Finding one that offers 5 percent on gas and groceries is a lot harder these days. I had one through Chase and they sent us new cards two weeks ago because the reward program “was ending.” I told them I was happy with the existing program and refused to change. They didn’t care. Guess what? The new rewards program does not gives us nearly as much money back. I’m currently in the market for a new gas/grocery card.

There are also great cards if you want airline or hotel perks. If you are a Costco member, Am Ex has a great card that is free with your annual membership and offers a cash back rebate on purchases at the warehouse – amazing!

So what is the cost of using cash? I would say 1-3 percent of your total spending every month. Call it a hidden cash tax!

Luke September 15, 2009 at 4:00 am

Great article! If you don’t want to go strictly with cash, there are several programs out there that can help manage virtual envelopes. One that I’ve created is called NeoBudget ( It uses the same basic principles as the envelope method, except you can use your debit card and have all your transactions tracked by your bank. Then just import those transactions and assign them to envelopes. For my family, this has been a much easier, and much more accurate way to track our finances and budget.

Camisetas September 15, 2009 at 5:08 pm

I am a big believer in cash too and we use the envelope system in our house too. Everyone gets an allowance for the month and we can use it on whatever we want. It helps me think a little more about what we are spending and I check in with Quicken often too.

We Seed Editor October 20, 2009 at 11:57 am

I like the cash idea — I love the tangibility of it. That said, it does seem like it would lead to a lot of logistical difficulties — how to pay your mortgage, for instance. It seems like you might be bringing home a lot of cash, putting it in envelopes, then taking it back and re-depositing it in the bank to pay bills. That sounds like not a lot of fun.

There are some interesting ideas spelled out as solutions, though — Steve’s ideas are good, and looks interesting, too. I’m wondering if these can be synced up with a site like, which is what my wife and I currently use? We don’t use the budget functionality, though — with a two-year-old daughter, we just find we don’t have the time for it.

But we’re on the case, and this article will be a great help moving forward. Thanks!

Lakita November 16, 2009 at 11:47 am

I’ve been seriously thinking about giving the envelope system a try….a least a modified version. I pay all my bills electronically, and that works well for me. I need to go cash only with all else (food, gas, entertainment) so I don’t overdo it.


Craig Jones November 21, 2009 at 8:13 am

This envelope budgeting system sounds like it could be a great help for those who need to watch their spending. I think it would be a good approach for anyone who’s focused on their financial planning.

vidya December 20, 2009 at 5:12 pm

Check out this interesting software that uses a similar concept:

Steve in W MA March 13, 2010 at 1:00 am

Don’t get confused about the utility of having perfect records. Credit cards offer you a perfect record of how you spent your money, but the problem in my experience
is that they give you a perfect after-the-fact record of you spending twice as much as you can really afford to.

I”ll take the cash envelope. After all, why do I need to know exactly what I spent the money in the envelope on if a) I’m within my budget (this is a given in the envelope system) and b) I have all the goods and products I need.

Finally, there is this: when things get really tough budgetwise, what people turn to is the envelope system. Because when every other thing fails, the envelope system succeeds in turning a bad financial situation around. So why not just use it all the time and maximize your financial success is my thought.

If you want to track your spending with the envelope system, just save your receipts or make a note on the envelope itself as you spend. But really, I find the tracking info is of little value. What is of most value is staying in budget and meeting financial goals, and the envelope system helps me do that wonderfully.

Keith Van Buskirk January 29, 2011 at 11:12 am

I like the suggestion of the envelope system and read through some of the comments, but I did not see anything about keeping cash receipts which is very important in budgeting…Being an addicted user of the debit card I have learned the hard way to keep EVERY receipt and ask for one if it is not offered…Just my 2 cents.

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