How To Use The Cash Envelope System

There are so many budgeting posts around, with various budgeting methods being discussed. But, how do you know which one to use? Often, the word budget conjures up a restrictive, boring process to go through. But, a budget shouldn’t be like that at all! In fact, if you combine an efficient budget method with the cash envelope system, it might just change your life.

So, what is the cash envelope system?

There are two parts to the cash envelope system. You can use it it in so many ways! In its basic form, the cash envelope system is there to provide with actual cash for your expenses, rather than tapping a card. If you are handing over cash for something, in general it will make you think twice about it.

It’s also so simple to set up!

Firstly, you need to think about your variable expenses. So, these are things that are not bills. Not the direct debits or standing orders. Those have to be paid electronically, via the bank, most of the time. Variable expenses are just that; the ones that fluctuate and therefore you have slightly more control over what you spend.

Things that might be included in your variable expense categories:

  • Food shopping
  • Petrol
  • Travel
  • Household
  • Cleaning
  • Pets
  • Children
  • Eating Out
  • Takeaways
  • Subs
  • Treats
  • Coffee

To be fair, the list can be endless! But, it has to use categories you use on a regular basis in order for this to be an effective budgeting method.

How to Budget for you catagories

Once you have decided on your variable expense categories, you need to decide how you are going to budget for them. This leaves you with two options; weekly or monthly.

There are obvious benefits to both. If you do them weekly, then leftover cash can be rolled over to the next week or removed to go towards your other longer term savings (see part two for the follow up to this) which can give you extra in your weekly amount or can boost your other savings. I myself use the weekly cash envelope method so I can keep a better eye on what I’m spending. Plus, I don’t have to have a lot of money sat in my house that way.

The monthly method is where you first work out your variable expenses. Then, you withdraw that amount of cash and divide into your envelopes. Depending on how many envelopes you have, this could be quite a substantial number! However, then you can clearly see how much money you have to live on for the next month, which can sometimes work better for individuals over the long run.

Variable Expenses

So, once you’ve worked out your variable expenses, just how does the cash envelope system help you to budget? Well, basically, the idea is that when you’ve spent the money, that’s it. You don’t have any more until you next fill your envelopes. So, if you know you’ve got £50 in the food shopping envelope, for example, then you only have £50 to spend on your food shop and nothing more.

As mentioned already, the act of handing over hard cash as opposed to tapping a card makes the process much more real. That might sound daft, but with everything being electronic now, it can sometimes feel like you’re not actually spending any money. Especially if you have your cards set up in a virtual wallet on your phone, this feels even less like spending money. And those one-click systems to can be dangerous if you are an impulse shopper. If you are strict with the cash envelope system, you can’t do this!

It can also help you to keep to more of a strict routine, because you are less likely to be tempted by things, because there isn’t money there to spend on them. I know that I am definitely one that can be tempted by offers in the supermarket. Who isn’t?! But, if I know I only have a certain amount in my cash envelope (remember I do mine weekly) then chances are that the thing I am being tempted by won’t fit in the budget. Plus, it’s probably something I don’t need either!

Takes Some Getting Used to!

That being said, the cash envelope system definitely takes some getting used to. This is especially the car if you are someone who rarely uses cash. To then switch to using cash for all variable expenses can feel strange. It might also take some trial and error to work out just what you need in there for your actual expenses. You might drastically over or underestimate to begin with, but you’ll get there.

Hopefully, over time you will find that the cash envelope system works really well. I have been using the system for a few years now and that, combined with my own budget planner, has been the best decision I ever made for my finances. I feel more in control and more knowledge about where my hard earned cash is actually going. Plus, I am making that decision, no-one else. 

Have you thought about using the cash envelope system? What is stopping you?

This is a post from Nicola AKA Frugal Cottage. Nicola is an award-winning personal finance blogger who loves talking about budgeting, investing and frugal living. Mum to two young boys, you can find her on her thriving YouTube channel, popular Instagram page, or over on her website, The Frugal Cottage.


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Lynn Beattie

Aka Mrs MummyPenny

Personal Finance Expert

I write about personal finance made simple, lifestyle choices that will save you time and money, as well as products and services that offer great value.

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