How to Shop Using Cash Envelopes

$100 banknotes in envelopeA couple of weeks ago when we discussed some of the pitfalls of credit cards, one of the suggestions made was to use the cash envelope system for buying groceries (and other essential items) instead. For those among us who need to relief of ditching the plastic, but who may be wary of the process, understanding the way that the cash envelope system works, and why it’s such a money-saver, is a great way to start.

How Cash Envelopes Work

The name says it all: when you shop using the cash envelope system you designate a specific amount of cold, hard cash to each budgeting category on a biweekly or monthly basis (depending on pay cycles) and put it in an envelope. Generally, people start with a few, key budget-busting categories such as groceries, eating out, entertainment, and fun money. To make the cash envelope system work, you must decide, based on your overall budget, how much to designate for each category. For the sake of simplicity, I will use whole numbers that I completely made up for a fictional family of four:

  • Groceries & Household Supplies: $500/month
  • Dining Out: $100/month
  • Entertainment & Parties: $100/month
  • “Fun” Money: $100/month ($30 each for parents, $20 each for children)

Using this system and these numbers, you need $800 of cash each month. Depending on your financial flexibility, you can take it all out at once, at the beginning of the month, or at two $400 intervals in accordance with your pay cycle.

Once you have the money, take it and put it in actual envelopes. You can either make your own, buy simple but durable plastic pencil cases, or even get fancy fabric ones from craft vendors. The only exception to this is the “Fun” money category which many people just place directly in their wallets.

Now, here’s the tricky part: every time you go shopping or plan to purchase something in these categories, take the envelope and use it to pay – only. When the money runs out, you are done making purchases. When it comes to groceries and other common household purchases, this is one of the key benefits to having stock items and taking advantage of free and nearly-free deals with coupons – it helps make ends meet when the envelopes get empty. Catalina printouts are as good as cash as well, so you can use them to pick up small “must-have” items if you save them over time (just be aware of expiration dates!)

At the end of the month, take stock of how much cash is left in each envelope. Anything left over can either roll over into the next month or go into a separate savings account for special purchases such as a new television for the living room or a vacation fund.

Why Cash Envelopes Work

It is easy to apply the cash envelope theory to any area of your budget, but many people find it most helpful in areas prone to causing problems. There is no limit or rules as to what categories you can designate for your envelopes and many people include things like clothing, gas, or larger household purchases such as décor. Basically, whatever items in your personal budget cause you problems, switch them to cash.

But why, you ask?

There are many reasons that the cash envelope system works. First and foremost, many people find that parting with cash is a lot more difficult that the often-automatic action of swiping a card. Even when using a debit card (which is equivalent to cash), many people tend to ignore the totals or details of their purchases.

In addition, even debit cards offer buyers some form of overdraft protection meaning that, even if you don’t have the money, you can still make the purchase. This isn’t so with cash envelopes. Rather, when the envelope is empty, so is your spending power. You may need to get creative in terms of your entertainment or your lunch choices in order to make the system work until you refill the envelope next month. This act of forcing accountability is often really helpful in terms of getting people on track budget-wise.

Finally, a lot of people who have successfully converted to the cash envelope system find it more freeing that restricting. Remember, every month you decide how much money to spend and where. If you want new clothes, you budget for it. If you want to go to the spa, you budget for it. Rather than leaving charges to chance, you are able to indulge in your favorite pastimes while maintaining control, and peace of mind, over your purchases and financial health.

Who among you uses cash envelopes? What tips would you provide for beginners? What has been the biggest benefit of this system in your life?

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  • Ella

    The main drawback of sticking to a weekly budget for food and household items is that I can’t stock up when the price is right, and I end up spending more in the long run.

    • Ah I understand where you are coming from. For me, when I have a good stockpile of items, there are weeks I don’t have to buy much. So, during those weeks, my grocery envelope grows which allows me to have weeks that I will spend more on some items…like say a great sale on chicken that I want to stock up on.

      • Linda Hughes

        I’ve been using the envelope system for a while now and never use anything but cash to pay for my groceries, gas and all HBA’s!! I love it!! By the way, when is your book coming out, Cindy?? I work at a library and want to make sure we put it in our collection.

        • Aww you are sweet Linda. It’s due out in the fall. No worries, I’ll be letting you all know about it as the time nears.

      • Chefpat

        Thanks to you and this site, I have had a good stockpile of items for about 16 weeks now where there are weeks when I don’t have to buy much. If I used all my grocery envelope money that has accumulated during those weeks to say, stock up on a good sale on chicken, I’d have to buy stock in Perdue to try to get a return on my investment!

    • Rocky

      To stock up like this, I started by using some of my budget to get the stock up items, and NOT getting some other things that I would usually get. Sounds strange, maybe, but, it can be done. And, I actually still do this. Each week, a portion of my budget goes towards stock up items, and, they have become my ‘must-have’s’. You just have to be willing to forego something that week that isn’t, perhaps, an actual necessity, but, that you regularly buy (for me, one week I didn’t buy cold cuts, which was normally a staple in our house, but, something we learned to do without that week). Or, you can do a split order/transaction whereby you do a catalina deal, first, separately, by itself, to give you a $5 catalina, then do a second transaction for your other items, using the catalina as an addition to your cash to pay for those items. Also, you will learn when to buy certain things. If you watch the posts on this site, you will see the great deals on household items that you can get cheaply. HABA items can also be moneymakers (when an insert coupon is used in conjunction with a store or ecoupon), and, even if you don’t need the product at that time, buy it for the extra few cents that it will put toward lowering your cash outlay. And so on. Little by little, as your stockpiles build up, you don’t have to keep paying full price for things each week, because you bought them for very little, and, you have them on hand. You just have to start thinking creatively, go slowly, and, don’t give up! Good luck!

  • Ashley

    My husband and I recently purchased our first home, and so budgeting has become even more important now. I want to start using the cash envelope system for at least groceries, I just haven’t started yet. But my husband and I put he majority of our paychecks in the bank to cover monthly bills and then we each take out an “allowance” in cash each week from our paychecks. Our allowance has to cover our gas for the week, and anything we do. If we eat out, go to the movies, want to buy something for ourselves, etc. If we have any of our allowance left at the end of the week, we put it away in a jar and then use it for a slightly larger purchase, or put it into savings.

    • Ashley

      And if we run out of our allowance money, then we are all done spending for the week!

  • Ms. Q

    I just started using the envelope system a week or so ago and when I say I can see the difference in my spending… it’s true. I started to pay MYSELF first and it makes you stingy on splurging because that’s all you have until the next pay. From this “allowance” I take all food cost, gas & fun money. I’m saving for my wedding which is this year (9 months) and I’m hoping this makes a big difference because I’m an avid shopper (home, personal & the kids) and it’s hard to hold back.

  • StlAmy

    I have not had a credit card in 10 years. The biggest draw back is credit. When you need it you can’t get it. My credit score will not increase until I get and use revolving lines of credit. If my furnace breaks I better have the cash or I am in trouble. The credit score rules in America want to trap you in.