The cash envelope system is an admired budgeting strategy. You’ll allocate a certain amount of cash for each category in your budget, and you’ll use that cash to pay for purchases in each category. Advocates of the system say using physical cash makes it easier to stick to your budget because you can physically see how much money is left in each envelope. There are a few downsides to the structure, though. If you lose track of an envelope or mess up your counter when you set up your envelopes at the beginning of the month, it’s easy to overspend and throw your whole budget off.

What is the envelope system’s mechanism?

The envelope budgeting system works like this: Each month, you assign every dollar of your income to a category. When the money is spent, it’s gone. It differs from an electronic budgeting system, where you can overspend on one type and then transfer available funds from another category to cover the overage.

Step 1: Decide on cash categories.

Start by building a list of all your monthly expenses. For each payment, decide whether you’re going to pay it with cash or electronically. Categories ideal for money includes food (groceries and dining out), clothing, and entertainment. You might also want to set aside cash for gas and miscellaneous or unexpected expenses.

Step 2: Separate expenses into envelopes.

Head to the bank and withdraw enough cash to cover the items on your list at the beginning of each month that it will pay in cash. Put this money in separate envelopes marked with each category name.

Step 3: Don’t spend more than you have in an envelope.

When you go grocery shopping, take only the amount of cash in your “food” envelope so you won’t be tempted to overspend.

Step 4: Label Each Envelope.

Include a picture of the items in the envelopes. Please make sure they’re visible without having to open up the envelope. If you’re using sleeves, consider printing them onto clear plastic instead of paper so they can be seen from all angles. If possible, include product dimensions on the front or back of the envelope so people know exactly what they should buy.

Pros of using a cash envelope system:

Easier to budget

No matter how you do it, budgeting can be difficult work. One of the benefits of the envelope system is that it makes budgeting much more straightforward. Each month, you put a certain amount of cash in each envelope. You can use only that amount to pay for the expenses listed on the envelope.

Less stress

When you don’t have enough money to pay for all your expenses, it’s easy to feel overwhelmed and stressed out. You might not even know which bills to pay or where to find the money for groceries. But with an envelope system, there will always be enough money to cover your basic needs and some discretionary spending. Empty envelopes are one less thing to worry about in your life, even if your bank account is low or you overspend on other items.

Easy to track spending

You don’t need a fancy smartphone app or a complicated spreadsheet when you use an envelope system for budgeting. Look at how much cash is in each envelope and subtract the amounts you spend from that total. Check the balance in your fun-money envelope if you’re trying to decide whether you have enough money left for pizza and a movie.

Cons of using an envelope system:

The most significant disadvantage of the envelope system is that it requires a lot of cash. Not only do you need to withdraw enough money to cover your monthly expenses, but if you want to go on vacation, you also need to withdraw the amount of cash you plan on spending ahead of time and put it in an envelope. This is fine for some people, but it can feel like a massive hassle for others.

The envelope system can also make it challenging to spend money online and pay bills electronically. While you can still set up automatic payments from your bank account, you’re at risk of overdrawing your account if you don’t keep track of how much is in each envelope.

If you do overdraw your account, this could result in hefty fees. If you have a checking account with overdraft protection, this will transfer funds from a linked savings account or credit card to cover it. But this results in additional fees and interest charges.

Finally, many people find the envelope system difficult because they aren’t great at saving

money. If they put $100 into their food envelope each month but spend $120 instead, they may be tempted to take money out of another envelope instead of cutting back on their spending.

Other Cash Envelope Systems:

The envelope system is prevalent among those who want to get their spending under control. But it’s not the only cash-only budgeting method out there. Here are several other options:

The Bank Account System: Instead of creating physical envelopes, you use a separate bank account for each category. The money is divided into different versions, and each version is dedicated to a specific type.

The Budget Allocation System: This system is similar to the bank account system in that you split up your money into different accounts, but it’s much less rigid. With this system, you don’t have specific accounts for specific categories. Instead, you allocate the money you can spend on different types each month. You transfer this amount from your primary checking account into your “fun” report for the month, and when that money runs out, you stop spending in that category for the rest of the month.

The Cash Envelope System: With this method, you divide your monthly income into different categories and then withdraw cash from your bank account for these categories. These cash envelopes are then used throughout the month when one runs out.