How To Make a Budget Using Cash Envelopes

Most of you who know me will know that I have been budgeting seriously for the past year and a half. During this time, I have tried every budget method under the sun, from spreadsheets to apps. 

The method that resonates with me and makes the most sense is the monthly budget model called the cash envelope system. I base my budget on the time I get paid. Not only has it helped me pay off close to $25,000 of debt on one modest salary, but it has also helped me understand and get control over where my money is going every month. 

If unexpected expenses arise, I save $1000 for an emergency fund, which has led to a more peaceful life for my husband and me. With my tracker sheets, I can see what I have spent in which budget area every month. 

I fully funded our holiday spending based on cash this year – I finally ditched the credit card! 

So today, I will show you how you can rely less on your cards and benefit from a cash-based budget.

What Is The Cash Envelope System?

It's all about taking budgeting back to pure cash. It helps you save money by having the money in front of you as you pay for items. 

The theory is that you will be more likely to spend your money wisely because you are handing over actual cash and not just tapping a card reader.

You have different amounts of cash stored in separate envelopes. The budget is determined by what you can afford.

If you're anything like me, I tend to overspend money if it's not in my hand and physical.

You can see the money in cash envelopes – it's tangible and not just abstract. 

You can see the cash reduction as you spend.

Ok, so abstract thought doesn't work for me with money. Mr. Budget says, ” Put it on a spreadsheet Elly, and it'll save you time.

 And yes, he's correct, but for all the pretty little spreadsheets in the world, I have never had one that made me stick to a monthly budget. 

As a thirty-something, I vaguely remember when my mum used to use cash all the time. 

When my time came to manage money, it was all about debit and credit cards and no REAL coinage in my hand.

When you need to spend your money because you need to pay at the till, suddenly, your budget becomes real, with actual rules. 

Unlike credit cards or debit cards, where you can just tap or swipe. I always found it easy to convince myself that what I had spent seemed much less. It looks so much more valuable when you have it in your hand!

When I first tried out my coffee envelope and emptied it one week into my budget month, going without coffee stung me for three weeks; I had to wait until the following budget amount. 

But because it was real cash, I felt bound to my agreement with myself. I was so pleased that, although it was hideously hard, I didn't reach for my debit card to buy more coffee. I knew each dollar had a purpose – each cent was going somewhere to help me pay off debts or save.

How To Start a Budget Envelope System

You will need to make a budget first.

Here are some other helpful related posts: 

How to Make a Budget

How to Stick to a Budget

Budget Recaps:

Budget Recap June 2019

Budget Recap July 2019

Record Your Spending

It's essential to do this for a month before figuring out your variable spending and cash envelopes categories.

Tracking your spending is essential, so you must start now if this is the first time you have followed it. 

Making your budget also involves:

  • Going through your bank statements to figure out what your fixed and variable spending has been.
  • Saving receipts.
  • Keeping an ongoing expense tracker.
  • Organizing your spending.

What Are The Categories of The Envelope System?

Working Out Your Budget Categories.

After a month of tracking your spending, you should see a pattern to your spending and be able to put these into categories. 

You could use one spend tracker and highlight the different categories with a highlighter. I either do this or separate my spend trackers for other categories.

My monthly process is to keep my receipts from variable spending and to fill in my spend tracker at least every couple of days.

For my budget, I transfer my main budget categories over to my budget sheet.

For example, I have fixed payments for car insurance, car tax, and variable fuel and motor repairs expenses. So I grouped these under transport.

Tip – Don't worry if you get it wrong the first time or need to remember something. This is perfectly normal and part of learning a new process. It took about three months to get going with my budget and money envelopes.

By tracking your spending, you can see what areas you are spending in. Once you know your categories, you need to total each area. 

This will form the basis for any amounts you give yourself in each cash envelope. My cash envelopes I use for variable spending.

Fixed Expenses and Variable Expenses

Fixed expenses in my budget are bills that go directly out of my bank account and vary very little.

Examples of Fixed Expenses:

  • Mortgage 
  •  House Insurance 
  •  Life Insurance
  •  Tax 
  •  Car Insurance 
  •  Car Payment 
  •  Loan Payment 

The cash envelope method is designed to be used for the variable expenses within your budget. These involve things you spend money on that fluctuate from month to month.

Examples of Variable Expenses:

  • Groceries 
  •  Eating Out  
  •  Entertainment
  •  Clothing 

I have experimented with which areas of my budget cash envelopes work. My cash envelopes are as follows: 

  1. Eating out – for anything me and Mr. Budget spend (food, coffee, etc.) 
  2.  Market – I buy fruit every week from the local market
  3.  Coffee – my blog fund, so I can sit and watch the world go by!
  4.  Breakfast – is my budget, so I can grab breakfast when I'm in a rush. 
  5.  Toiletries – for toothpaste, shampoo (bathroom essentials) 

Set Limits for Each Cash Envelope Category

Now you have made your budget and tracked your spending, set your money envelope budget limits. I do this at the same time every month. So I determine whether my budget amounts fit and balance when I add everything up.

You will find that you are learning more about your spending every month, and you can adjust your categories. 


Mr. Budget and I, as a result of cash envelopes, ended up spending a lot less one month than my budget amount of £250 on eating out. 

But we overspent on groceries (we were more conscious of eating out!) The following month, I adjusted the amount to £250 for groceries and reduced my eating-out cash envelope to £200. 

Spreadsheet showing my spending totals for July 2019

Spending totals July 2019

Make Labeled Envelopes Corresponding With Your Categories.

After you have balanced your budget, it's time to make your cash envelopes. I label mine with the month and how much my budget amount is. 

The backstory to the cash envelopes. Below I will explain other reasons why I like cash envelopes, but I love making my own. 

The truth is, I researched them online, and they were either boring mail envelopes, super expensive, or not able to be organized in the way I wanted them. So I thought – well, girl, you should make some of your own. 

I have got some resources you can use below that I've created. Keep looking out because I add them all the time. If you subscribe to the budget newsletter, I regularly send out my subscriber's freebie envelopes, trackers, and budget sheets!

Decide When You Withdraw Cash.

My rule is that I withdraw my cash the day I get paid. My budget for the month works between payday and payday. You should take your money out on each payday if you get paid twice a month. 

Pay Your Bills

Ensure you leave enough money in your main account to cover your fixed bills. Since these come out monthly, you should continue or set up direct debits when your pay comes out to have a balanced account. 

If you get paid twice, have half of your bills coming out between the 1st and the 15th, then the next half exiting your account later. 

Other options for paying your fixed expenses include using electronic pay or a debit card. This prevents you from running to the bank lots of times to pay them (which would be a waste of time).

How Much Should I Put in a Cash Envelope?

I love stuffing my cash envelopes every month. It gives me such a sense of control and peace to know that this cash is the only thing I can use that month. 

So if you have budgeted a total of $200 for groceries that month, you need to put $200 in that cash envelope. You can find the information for each cash envelope in your budget sheet. 

So I can quickly find the cash envelope budgets across my sheet, I write CE next to each part I will put in a cash envelope.

Rules for Using The Envelope System

Use the money in each envelope for the budget area it is for.

Try to use something other than money from one envelope for another budget area. 

For example, if you are in the grocery store and as you are shopping, you figure you are about to overspend by £10, put that amount back and keep the essentials. It is strictly about keeping within the budget in each budget area. Challenge yourself to use food from the cupboard, or bulk-freeze meals, to cut grocery shopping costs further.

Try Not to Cheat The System.

If you run out of money to eat out, it can be tempting to reach for your debit or credit card. You could cook at home cheaply, using your grocery budget. 

If you run out of kids' activity money, think of cheap alternatives like taking them and the dog out to the local park for free or going for a beach walk.

 Get to know your pet's quirks to save money within your vet budget envelope. There are many ways to save additional money by being creative!

Have an Overall Goal To Keep You Motivated

Goals can be small or incredibly large to keep you motivated. When I started, my original plan was to budget to pay off debt. 

A goal will motivate you and help you focus on where to put your spare cash. 

So my goal, now I have paid off our debt, is to pay off the mortgage early. (Hopefully in 5 years) Every penny of spare cash goes towards making an overpayment on this.

Treat Yourself if You Achieve a Balanced Budget.

This is crucial to me and has always been an essential feature of my budgeting. This way, I stay motivated to achieve my goals. I always think of ways to look after and value myself, so I suggest you do this You will become more excited and optimistic as time goes on, as you reach your end goals! You might have £15 left over in your beauty budget and decide to roll it over to the next month. Maybe you love a glass of wine in a great wine bar in town or meeting up with a friend for a fancy coffee. It's all up to you!

Questions about cash envelopes from readers  

But Helen, Money Envelopes Were So Last Century – No One Carries Cash Now!

Why Use a Cash Envelope When It's Easy To Use My Card?

Cash, as a system, isn't favored by many people anymore, as manual budgeting can take a long time. Money is fiddly and can be heavy, but it is working, and I am hitting my goals every month, as now I am only able to spend what is physically allocated to me, and I don't let myself spend out of our current account. 

Why Bother Clunking Around With Coins and Fumbling at The Counter 

The peace of mind I achieve at the end of each month is so worth this. 

So you don't get caught out at the counter fumbling with your cash envelopes, just some cash out into your hand before you enter the particular shop you are using the cash envelope with. It ensures you are calmer and less likely to drop the cash, especially if you are not used to handling it as much as you do when you have cash envelopes.

In the UK, we have more coins, so I use a clip on the end of my envelopes. Also, 110gsm paper is thicker, my cash envelopes are more robust, and I hold coins more effectively then. 

Are There Any Other Reasons You Like Cash Envelopes So Much?

It makes me wander around the shop once more and work out if I can spend what I plan to pay or get through the month if I empty my cash envelopes too early.

They are colorful, pretty little controls for me. Haha – having a cash envelope makes me accountable to myself. If I buy that coffee today, can I sit and blog in a cafe at the end of the month? Or if we go out for that meal, will we afford to get through the rest of the month without any other treats?

It's like I have an internal conversation that my debit card or credit card never inspired. This inner talk for me leads me to keep within my budget. It's like I'm bargaining and planning at the same time with myself. Cash from my debit card or credit card was used to fly out without pain until the end of the month when I would frequently end up in overdraft unnecessarily.

Elly, I'm Worried About Getting Mugged With Cash Envelopes on Me. It's a Genuine Concern. What Would You Suggest?

This question comes up a lot. Yes, I hear you – I felt a bit exposed having cash in my handbag for the first time in years.


I use a spare cash envelope for a grocery shopping trip. So my main grocery cash envelope stays at home, and I might, for example, take out £50 to cover my shopping. I put the cash back into my main grocery cash envelope when I get home. That way, I carry less money. 

The other way I think about it is that statistically, you are at the same risk of someone stealing your bag and accessing all your data on your phone or using your contactless debit card. Every day, I don't tend to worry about any of this, so I decided to stop worrying about having cash stolen.

I have purchased a Filofax mini binder, which I will use to carry whatever cash envelopes I use to minimize the risk of them falling out of my bag. 

What if my spouse goes shopping or buys something once in a while? 

You can organize this in several ways.

Not keen on cash envelopes.

Mr. Budget is not keen on using cash envelopes, so I note his spending and pay in the difference that should have come out of the cash envelopes, with whatever is left at the end of the month. This means I have to spend a bit more spare money on the envelope than he will spend. 

Want to use cash envelopes?

  1. If your spouse is keen to use the envelopes, why not keep them at home? If you know your spouse is due to do the grocery shopping, they can take the envelope from where you keep them. 
  2.  If your spouse says, for example, tends to spend approximately £50 a month, and the whole budget is £250, make a cash envelope for you with £200 and a cash envelope for him for £50. Keep adjusting the amounts until you have the approximate spending spot on. It could take two or three months to get right.

How do you manage your fixed expenses? 

I keep this money in our current account for our fixed household expenses. When setting my budget, I put all these onto my budget sheet, so I know how much money will go out on direct debit.


Steps to Success With Using Cash Envelopes as a Budget Method.

  1. Make a budget.
  2.  Record your spending
  3.  Make categories for your spending.
  4.  Set mini budgets for each type.
  5.   Decide when to take cash out.
  6.  Pay your regular bills and fixed expenses online or by direct debit.
  7.  Take some money out and fill your envelopes.
  8.  Only use money in each envelope for that specific category.

When people say to me, Elly, it just didn't work for me, it's usually because they rushed through the steps and either missed one or didn't take the time to complete one step to learn how it links to the other steps in the process.

This is a journey that, as time goes on, you will learn loads from, so give it a chance and give it time. Stick to your budget, and you will soon be smashing your financial goals!