Jason Price

Cash envelope budgeting is a technique of budgeting that’s been around for a long time. While I think it’s an excellent technique for budgeting, I prefer a modified approach I think makes more real-world sense.

Overview of cash envelope budgeting

In case you don’t know or need a refresher, cash envelope budgeting involves using envelopes to manage money. An envelope is created for each of your budget categories such as food, clothes, entertainment, transportation, etc. After you receive a paycheck you fund each individual envelope (or budget category) the cash allotted to it for the month.

When it’s time to spend, you take the envelope with you to the store (or withdraw the cash before you go to the store) and spend the money as needed. The key to envelope budgeting is when the cash is gone, it’s gone. There is no more spending. The only way you can spend more money for that particular category or envelope is to transfer money from another envelope. Of course, that will reduce spending from the envelope you transferred from to fund the category in which you needed more money.

Online cash envelope budgeting

I don’t think many would argue against this budgeting system. In fact, Mvelopes Personal (the budgeting software I currently use) is an online form of the envelope budgeting system. Instead of using physical envelopes to budget, Mvelopes Personal uses virtual envelopes. In fact, one of the features I love is the ability to electronically transfer money from one envelope to another.

In the real world, you may need more money one month for food (perhaps you had visitors who came in town). Well, your current food budget might not meet the need, so you may choose to reduce spending in another area to fund food. It works exactly the same as with the cash example except you’re performing the transfer within the software.

Challenges with cash envelope budgeting

While the envelope budgeting system is a great tool for budgeting and personal cash flow management; managing a lot of cash can be challenging. First, it may not be a good idea to walk around with 10 envelopes full of all your money budgeted for the month. Secondly, it can be challenging to count out cash when in a hurry at the store. Finally, what do you do if your purchase is spread across 3-4 categories which can sometimes occur if you’re at the grocery store. You’ll end up juggling envelopes.

Of course, there are ways around such challenges by keeping your budget categories high level (grocery store items instead of categories for food, household, toiletry, etc.). And as I mentioned above, you can always pull cash from envelopes before leaving the house so that you’re not carrying around all those envelopes.

Modified approach to cash envelope budgeting

But given these challenges a modified approach to the envelope budgeting system works better.  Some  areas or categories of the budget don’t fit well with cash envelope management.  For example, you probably aren’t going to make a car or mortgage payment with cash.  But as a better example, you may not need to use cash for gasoline purchases either. You know what it costs to drive your car to work each day (not withstanding sharp changes to gas prices).  Therefore, you don’t expect to spend more than the budgeted amount for the month unless there is a again a sharp change in gas prices, or a special trip is planned.

With the modified approach, pick out 3-4 categories that present the biggest spending challenges for you each month. Good examples include entertainment, food and clothing. These three categories can result in impulse buying. For these categories (or others of your choosing), I suggest you withdraw cash and use physical envelopes.

Not only is this easier from a cash flow management standpoint, you’re in tighter control of spending in areas that cause the most temptation. In regards to cash flow management, you only have to manage one transaction per category. This is the transaction used for withdrawing the money. In regards to tighter control, you’re able to leverage all the classic advantages of the cash envelope budgeting system I touched on earlier.  But the beauty is you’ve also limited your use of a credit card or check card. Studies have shown using either checks or credit card can result in more spending.

The using cash for purchases video from Crown Financial Ministries is a great example of how this works.

Envelope Budgeting: A Closer Look

Many people use the popular cash envelope budgeting method to manage their spending each month. With this method you insert cash into spending envelopes for different spending categories such as bills, food, entertainment, etc. You then withdraw the cash from the appropriate envelope when you need to purchase something. Overall, I’m a fan of creating a budget and manage spending using this method because it helps people plan their spending and does well to avoid over spending.

Let’s take a closer look at envelope budgeting and a few odds and ends of when it works best and when it might be more challenging to use.

Limit Envelopes

In my opinion, envelope budgeting works best when you can limit your spending categories, or envelopes, to approximately 10 or less. Some people like to create multiple subcategories in their budget. For example, my budget has about 10 subcategories for my monthly miscellaneous category. I couldn’t imagine keeping the cash straight for all those subcategories and transfer it between each envelope as required. There is just too much management overhead with this many envelopes. In this particular example, envelope budgeting would work better by having one envelope for my miscellaneous spending category.

Problematic Spending

You might find a hybrid approach to cash envelope budgeting works best for you rather than using cash for every spending category. With this hybrid approach you only use cash envelopes for areas in your budget that are problematic, or often difficult to avoid over spending. If you tend to over spend electronically every month for entertainment, clothing, etc., you might choose to manage those spending categories with cash. Simply go to an ATM when you get paid, withdraw the cash you need for the problematic categories and deposit the cash into the appropriate envelopes. Once the cash is gone, you’re done spending for the month. You can also quickly count the cash you have left if you’re thinking about spending it.

Transferring Money

Envelope budgeting isn’t perfect and neither is your spending. More than likely some spending categories are going to require more cash each month than planned, while some will require less. You must be open and flexible to transferring money from one envelope to another to adjust your plan for the month. For example, family comes in town to stay with you and you spend more money on food. You have to be willing to take cash from another envelope, i.e. adjust spending priorities, to fund the food envelope with more money.  This is actively managing your spending each month and is required to make sure your budget stays in balance.

Multiple Envelopes for One Shopping Trip

Be careful to plan your spending, or shopping trips wisely. For example, you may find it difficult to carry several cash envelopes with you to the grocery store and have to withdraw from each envelope when checking out. Perhaps one envelope is for toiletry items, one for household goods and one for food.  You’re better off estimating how much you need from each envelope and withdrawing the cash from each before you go to the store. Once you return from the store you can make sure the appropriate amount of money is returned to each envelope. Note: This can be difficult to manage if you have too many spending categories as described above.

Want to use a debit card?

One of the inherent challenges with the envelope system is that you have to basically use cash for everything.

If you like the method, but want the convenience of a debit card, then definitely check out the Real Money Budgeting method.

Do you use envelope budgeting?  If so, what are some tips you can share with the readers?

What do you think about cash envelope budgeting? Have you had experience with it before and what have you found to be advantages and challenges? What do you think about the modified approach to cash envelope budgeting?