Cash Envelope Budgeting: Why Your Bank Hates It

Envelope Budgeting


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In a recent article by the New York Times they estimate that Banks will make over $27 Billion dollars off of consumers overdrafts from checks and debit cards. Let’s just say that you are expecting a $400 check to be deposited on Friday, it’s Friday so you go out to lunch with your coworkers $13.65, Saturday you take the family out for breakfast $39.28 and Sunday you hit the grocery store to get ready for the week to the tune of $89.72.  Monday morning you login to your banks website to see what’s what and realize that your deposit didn’t clear and you now owe $81 in overdraft protection fees that your friendly neighborhood bank won’t refund.  So what’s the answer? Envelope Budgeting with cash.

Envelope Budgeting?

Cash and envelopes are tangible and finite.  At any given time you know with absolute certainty how much money you have on hand and what it’s for.  On average you will simply spend less on purchases when you pay for them with cash then you would with credit or even debit cards.  When you have to hand over your cold hard cash it really makes you think about the expense.  Think about it, say you’ve got $200 in your clothing envelope and you happen to find a shiny new Gore-Tex jacket that you just have to have for $179.  A great deal right?  But think how sad those lonely 21 dollars will feel when 179 of their brothers and sisters leave.  Suddenly that envelope starts to feel empty and maybe you don’t really need a new jacket after all.

Cash Envelope Budgeting Basics

Pulling out cash for each pay period and separating it into various spending categories is definitely not a new concept.  In fact your grandparents or their parents might have used the same system.

Step 1: decide what spending categories you are going to use for each envelope and write them down or track them in your personal finance software.

Step 2: decide the dollar amounts for each category.

Step 3: go to your bank and withdraw the appropriate money to fill your envelopes.  It might be a good idea to do a little simple math and figure out what size bills and how many of each denomination you’d like.

Step 4: put the cash in your envelopes whether those would be some extras you got from the bank or some more formal type of envelope system (see links below).

Step 5: now whenever you go to make a purchase pay for it using only cash from that particular category.  When you have no more cash in that category you stop buying stuff.

Step 6: (optional) you can track your individual purchases, but since you’ve already predetermined your budget there isn’t a driving need unless you want to be more specific about tracking your spending.

I don’t necessarily advocate using cash envelopes for everything, as it makes sense to automate some of your finances for bills and more finite items that can be drawn directly from your bank.  Some possible cash envelope categories: Groceries, Dining Out, Gasoline, Spending Money, Entertainment, Clothing, Vacation and Gifts.

Cashless Options for Envelope Budgeting

If you are dead set against carrying around large quantities of cash then you certainly can try some different methods using a similar methodology.  I wrote an article for Wisebread on Using Prepaid Gift Cards as a Cash substitute that might be right up your alley.

My Own Experience

My wife and I have used cash envelopes since January 2009 with tremendous success.  We have always had a hard time maintaining a budget because we couldn’t agree on a system so we just spent away with our debit cards until the end of the month and would find that we spent several hundred dollars on eating out or some other non essential item.  My wife really likes it because she always knows where we stand and doesn’t feel like she needs permission or has to check with me to see how much money is left in our common categories.  That way we can be sure we aren’t overspending.  August of 09 we fell off the wagon so to speak and I didn’t get to the bank in time to pull out our money so we just free-formed it and as predicted we overspent in several categories.  It really cemented for us that this is a system that is terribly simple and works.

Envelope Systems

It’s kind of hard to find any sort of nice envelope system any more.  Here’s one available at Amazon Deluxe Executive Envelope System that is the same as the system my wife and I use. You can always make your own or ask for several extra envelopes from your bank when you pull out your cash. Have you had any success yourself? We’d love to hear about it.

Using Cash Envelopes with Budgeting Software

Depending on how you setup your budgeting software it’s very straightforward to integrate envelope budgeting with your automated expense tracking. I use You Need a Budget which works exceptionally well with our envelope system. When I pull out my cash for the pay period I right down the various categories and how much for each. In YNAB I just go in and enter a transaction with the total amount withdrawn and then for the category I choose split. It then lets me allocate a certain amount for each separate category like entertainment, spending, groceries and the like. It works great.

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rb 2009/09/09 at 9:18 pm

I’m switching to the cash only approach and have found some success with getting small bills from the teller at the bank and setting them aside like you covered above. It really is more uncomfortable parting with cash vs a credit or even debit card. My motivation for the change was finally getting tired of the entire banking system with them holding checks for an unusually long time, not crediting direct deposits on time, ATM fees, and probable many others I am unaware of.

Jason @ Redeeming Riches 2009/09/10 at 8:33 am

It is true, there is something about parting with cash that makes it more difficult to spend. Maybe because you actually see it in your wallet disappearing.

For me, it’s easy to swipe a card and forget about the transaction until the bill comes, especially with dining out.
.-= Jason @ Redeeming Riches´s last blog ..Slaying This Monster Will Help You Get Ahead =-.

Jack @ Master Your Card 2009/09/10 at 8:57 am

The idea is brilliant – I may give it a shot myself. Lately, I’ve been feeling estranged by the postmodern electronic world and feel that a move back towards tangible systems may do the world some good. You can budget you want automatically, but sometimes if a budget is built automatically, it’s easier to ignore. Having actual envelopes and handwritten missives help to ingrain the realness of it all.
.-= Jack @ Master Your Card´s last blog ..The Lenders Strikeback Pt. 2: More Credit CARD Act Loopholes =-.

Craig 2009/09/10 at 12:32 pm

Great way to think about this. Never really hits you but it’s true. Same thing goes for CC companies who want you to pay the minimum to gain interest fees and hate those who pay in full. Need to be careful not to overdraft.

Kelly @ On the Road to $1M 2009/09/10 at 1:36 pm

I don’t use the cash system -my partner and I have separate bank accounts and are very disciplined with our expenses. However, in order to avoid the situation you describe in the beginning of the post and end up paying overdraft fees I always keep a buffer in my account of at least $500. This way I know that even if a deposit doesn’t clear I won’t owe fees to the bank. I hate paying this type of fees and try to avoid them at all costs.
.-= Kelly @ On the Road to $1M´s last blog ..Book Review: Secrets of Millionaire Moms =-.

Stephanie 2009/09/10 at 1:46 pm

I think it’s interesting that a lot of people are moving towards a cash only approach. Some money experts are agreeing, as there has been many rises in debit card fees.

StephnMO 2009/09/10 at 1:49 pm

It’s an interesting idea, especially if you are having problems with overdraft and other bank fees. I personally use my debit card because I don’t like carrying a lot of cash on me. I can see where the system may help me spend less though.

ctreit 2009/09/11 at 5:12 am

This system seems to be working quite well for a lot of people, probably because it is simple and can be followed easily. It also visualized better how actual money is spent. When you use credit cards, you don’t ever have that same feeling you get when spending cash, i.e. when giving up your hard earned money.
.-= ctreit´s last blog ..Just “do it”? Not if “paying the piper” means paying out more than we have. =-.

Steve in W MA 2009/09/12 at 1:35 am

Using the cash envelope system has been saving me a lot of money.

As an envelope system I use a gallon ziploc bag with three paper envelopes (food, gas, and entertainment), plus a change envelope (I don’t keep change inside the cash envelopes) inside and my id and bank card.

It’s so dorky to pull out that the system itself restrains my spending before I even get to the envelopes.

Tom in NJ 2010/01/31 at 3:29 pm

I do EXACTLY the same as Steve in W MA. I put cash in five envelopes which I keep in a gallon ziploc bag. One each for: Transportation(gas/commuting costs), Bills, Groceries, Vacation and one for money I send to my Mom. (No coin envelopes.) At the end of each month I’m sure I’m on-track for each expense and then deposit it into checking. Using this method I’m sure I don’t borrow from one category to pay another and keep on-track. I also keep a $250 “cash-cushion in my checking account so I never overdraft. And I’m finally close to paying-off two charge cards. It’s the only system that works for me and I got the envelopes free from my bank.

paul 2010/01/31 at 5:16 pm

Way to go Tom. We’ve recently paid all of our non house debt off and it’s the same method we are using now, it just is so simple and it works.

Paige 2010/04/25 at 5:55 pm

I’ve been using the envelope system for several months now and I really love it. I’ve never been a really big spender, but it’s so much easier to track spending and see how much you’re saving, etc. My only issue is that carrying around envelopes full of cash can be bulky (and a little worrying if you’ve got several hundred dollars in cash at the beginning of the month). I’m trying to figure out a nice system that will fit in my little purse (i.e. smaller than standard sized envelopes) now.

Steve in W MA 2010/04/25 at 6:50 pm

Paige, try cutting the envelopes to within half an inch of to the size you want (say, large enough to fit a folded-over wad of bills in) , then folding the cut end over to make a half-inch flap where you have cut and gluing it with Elmer’s Glue. That way you can have much smaller-sized envelopes.

paul 2010/04/26 at 7:45 am

I like Steve’s tips Paige. Incidentally I’m working on a potential product right now to help with exactly the issue you mention. I’ll keep you posted as I move along but there just aren’t many ready made options for us envelope budgeters today.

Bill 2010/04/26 at 7:33 am

I’m not into cash, however a trick I use with plastic; everytime I use my debit card or credit card I deduct the amount from my check book immediatley after the transaction. Yes I usually end up with a negative balance in my check resister and yes I worry about it. As far as I am concerned if you use a credit card you have overdrawn your finances and you need to do something about it at once.

Steve in W MA 2010/05/01 at 9:25 pm

Bill, that’s a great system to keep from getting overdrawn. Since that’s working for you, you may want to go the extra step of creating an envelope budget outline for yourself, then, rather than carrying actual cash envelopes, listing the amounts you intend to spend for each category in the month on an index card in your wallet or taped to your check register. Then not only can you deduct the amounts you spend from your register, you can keep a running tally of how much money is left in your most important discretionary budget categories like food, transportation, entertainment, or whatever. Referring to the card with your monthly spending category balances on it is a great way to reinforce spending by plan as opposed to just spending by your checkbook balance.

Making a budget plan like this is also great for those annual/ occasional expenses like an annual internet access bill or car excise tax. Just allocate 1/12 of the annual cost of the item into your spending category every month and once the year is up and the bill arrives, you are good to go with no surprises.

With this kind of a method actually, referring to your budget becomes almost more important and primary than referring to your checking account balance, because you will have hundreds or thousands of dollars in your checking account that are not really available to spend, but are allocated for various expected future expenses (car repair, car replacement, medical copay fund, whatever).

Keep it up and I think if you give it a try you will find it extremely useful.

Gwen 2010/04/27 at 7:56 pm

My husband and I have been using the cash envelope system for about six years now. Before doing the system we’d put everything on the credit card (to earn “points”) and always pay it off each month. The thing that still fascinates me since switching is we spend less than we did before and yet I feel like I have more freedom to spend than I did before. I suppose because before I always had the pressure looming over me of the upcoming credit card bill. No longer – it’s easy to see at a glance where our spending is and to make instant decisions of whether we can afford something this month or if we need to cut back or whatever.

We definitely have months where we don’t make it to the bank for our monthly cash allotments and end up using the debit card and we absolutely always spend more those months. Not to mention balancing the checking account is then a pain!

By the way, I use a coupon file instead of envelopes. Granted, I carry a purse, so this is easy for me. But it has thirteen slots and I don’t even have that many budget categories. So I have room for receipts in the front, and a few categories of coupons too.

paul 2010/04/27 at 9:25 pm

Way to go Gwen! I wish everyone would believe us that such a simple system can work so very well!

Steve in W MA 2010/05/01 at 9:32 pm

Gwen, on those months that you don’t make it to the bank in time to stock your envelopes, try my method that I described to Bill a couple of posts above: Take an index card and list your envelope allotment for each category on it. Then as you spend, write the amount down on another card (or staple the card or a stack of them together) and then you can either immediately or soon thereafter at the end of the day update the available budget “envelope” balance on the first index card. Now when you spend you can refer to the index card first to see how much is left in your “envelope”.

This could help keep you on the wagon until you make it to the bank to finally stock those envelopes for the month!


Jessica 2010/06/30 at 1:50 pm

Anyone who takes a note of this and use it should see the benefits. We have used the envelope system for a while now, but trouble it has is when paychecks go up and down. I’m all for it and think with this you should have one for coupons too as that will only help knock down some of the spending on groceries.

Christine 2010/06/30 at 3:41 pm

I’ve been trying to do the envelope system. I have a nice excel spreadsheet and the envelopes, but I’m getting frustrated. Maybe someone can help me. A few envelopes I have, Home Repair, Car Repair, Household, Personal, Household, Gas, Food, Savings, just to name a few. The problem I’m having is I pay my main bills for that pay period (paid bi-wkly) What’s left over, I distribute between envelopes. But I never have enough to fill all the envelopes. Plus I think, it’s going to take me for life if all I put is $10 or $20 into Home Repair and Car Repair. What if I need a new tire tomorrow, I won’t have it. I was thinking of one of two solutions. I actually always pay my gas and food envelope first. So it’s what’s left over from that point goes into the others. 1) Putting money into which ever envelopes come next. Then the next pay period, the money for envelopes will go into the ones I coudn’t fill the prior week. or 2) After food and gas envelope, what ever is left, put it all into home repair. The next payday, the lump sum will go into the next envelope. Does that make sense? Thanks Christine

Mimi 2012/04/21 at 2:25 pm

I differ from most here. First thing when I open a checking account is to opt out of overdraft protection. For me, it is the bank who benefits from the overdraft fees, not me. I’d rather get rejected at POS when I’m buying something to let me know I’m out of funds than to have false security that I have money to keep on spending. It also works for me that my husband and I are on the same page when it comes to finances. We are one of those who uses credit cards to our advantage. We have never carried a balance and have taken advantage of the frequent flyer miles and cash back offered by credit card companies. With paying cash, you don’t get those perks, all you have are receipts. With using credit cards, you also have records of payments you made and can easily track it down, if necessary. PLUS the added advantage in case I lose my card, I will not be held responsible for unauthorized usage or maximum I have to pay would be $50. Whereas with envelope cash system, if your purse gets stolen, there goes all your hard earned money that you cannot retrieved. Using credit cards and debit cards can be just like using cash as long as one has the discipline to live within one’s wage. If you live your wage, you don’t have to worry about overspending. My 2 cents.

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