As most readers know, Dave Ramsey is a financial coach who has helped millions of people get out of debt and build long-term wealth. Part of his program involves the cash envelope system, in which money is kept in physical envelopes that correspond to specific budget categories.
The cash envelope system can be scary at first. It certainly was for me.
I was afraid of losing my money and losing track of each category, both of which did occur when I was first starting out. And I was also afraid that my cash would get stolen, which turned out to be an unfounded fear.
But despite those initial reservations and a few bumps in the road, I now prefer this method to paying by debit card for most budget categories.
Using cash envelopes takes some getting used to. But once you get into the routine, you will like it better.
It doesn’t have to be complicated or time consuming. It will become a habit after a couple of months. The important thing to remember is that it’s worth the effort, because it will help you stick to your budget.
The cash envelope system works well with a zero-based budget, which you can learn more about in this step-by-step guide.
The Dave Ramsey Envelope System Explained
Everything starts with a budget, which is the foundation for all of your finances. The cash envelope system is a way to keep track of spending in certain categories in order to stay on budget.
It’s a simple method that can produce powerful results.
When using the envelope budgeting system, you’ll pay cash for most of the expenses in your budget. This cash is allocated among a series of envelopes, with each one corresponding to a specific budget category.
When an envelope runs out of cash, you’re done spending in that category until the money is replenished.
Part of the purpose of the system is to help you learn to be more intentional with your spending. It accomplishes this goal in two ways.
First, it allows you to physically see how much money you have left in each category.
And second, it forces you to feel the cash leaving your hands.
There’s a big difference between looking at numbers on a screen and seeing cash on your kitchen table. And there’s a difference in how it feels to swipe a debit card compared to how it feels to hand over a stack of bills.
In other words, the cash envelope system helps you think about your money and your spending in concrete terms. It forces you to be honest with yourself about how much you have, to be conscious of how your financial resources are divided up between your needs, and to feel the sting of letting go of those resources.
Why Use Cash Instead Of Debit — Isn’t It The Same?
Studies have shown that you spend 15-20% less with cash over a card (even a debit card). That’s because, as noted above, there’s a psychological difference between the two actions.
Swiping a card is relatively “frictionless.” You don’t have to look at, touch, or give away your money. You just swipe a little piece of plastic and walk away with your purchase. It allows you to dissociate your wants from their costs.
On the other hand, paying with cash makes you constantly ask yourself whether or not whatever you’re buying is really worth it.
Paying with cash makes spending feel more real.
It’s easy to swipe a card and hard to part with physical money.
Do I Have To Use Cash For Everything?
No, you do not have to use cash for everything. Generally speaking, there’s no benefit to paying your normal monthly bills with cash. That would be very cumbersome (and in some cases, risky). After all, do you really want to hand-deliver cash for your rent or mortgage every month? And some expenses, like your car payment or utility bill, may not be payable in cash at all.
You want to pay cash for things you may be overspending on.
You can also use cash for sinking funds.
Sinking funds are just savings funds for expected expenses, like Christmas, vehicle registrations, and other recurring yearly costs. A sinking fund can also be just a general savings fund for things like house repairs and child expenses.
Some examples of envelope categories include:
- Animal expenses
- Dining out
- Pocket money
- Miscellaneous/variable expenses
These are examples and you may have different categories.
The Benefits Of Using Cash
Like I said before, you spend less with cash overall. It’s easier to stick to your monthly budget, which helps you reach your financial goals quicker and easier.
One study found that consumers who use credit cards focus on the benefits of a product rather than its cost. Another study found that those paying with a credit card were willing to spend twice as much on a product as those using cash.
Study after study shows that you will spend more with a credit card because it’s psychologically different than using cash.
Using cash saves money!
If you follow the rules of the system, it helps keep you from overspending. You do have to have a degree of self-control, and it may take screwing up a couple of times to get you on the right track. There will be times that you make mistakes. But the goal is to learn from those mistakes and create better long-term saving and spending habits.
It can also get you a discount.
Many businesses will give you a cash discount. They don’t have to pay the credit card fees, and it’s less risky because they don’t have to worry about the charge being disputed after the fact.
Cash is especially helpful for small businesses with limited cashflow, because they get the income immediately as opposed to waiting weeks or months for a disbursement from the credit card company.
You should always ask for a cash discount because most places will give you one. Hospitals and doctor’s offices will often give you a cash discount even if you have insurance. It never hurts to ask.
Are There Drawbacks To Using Cash Envelopes?
There are a few disadvantages to using cash, but they don’t outweigh the benefits.
- You have to go to the bank every pay period in order to get all the increments that you need. Once you get into the routine of doing this, you’ll feel lost when you don’t make it to the bank.
- You have to sort and keep track of the cash you have on hand. This only takes a few minutes since you know what you need for each category (because it’s in your budget).
- It can be easy to forget what the cash is for if it’s just a general category and not labeled for something specific. I do this at times. I will see that I have so much in the “Kids” category and proceed to spend it on the kids, only to remember that I needed it for a certain activity or event. This is easy to prevent with a sticky note, paper clips, index cards or even a note on the back of the envelopes. Just label what the money’s for so you don’t forget.
- It could get lost or stolen. When you lose your debit card, you can call your bank and have them cancel it. When you lose cash, it’s gone for good. So using cash requires extra caution.
It’s important to keep track of your personal belongings. It’s easy to get complacent and not pay attention to what’s going on around you. I was a police officer for 10 years and con artists and thieves are everywhere.
Only carry the cash that you need at that time to limit your risk.
What If I Waste It?
You might be tempted to spend all the cash on things it wasn’t meant for. This is just where you have to decide what’s important to you and define specific goals for your money.
If you’re tempted to spend, put index cards with the cash and lay out what it’s for and only what it’s for. Even put a picture of your goal. You can even write yourself a giant note saying “Don’t waste this!”
Stay focused on your short and long-term goals.
It can be tempting to spend all the cash frivolously, but stay focused and remind yourself that you’re a grown up and you can do this. If you do screw up, figure out a way to earn the money back. Sell something, adjust your budget and cut your spending money budget for a month. If you make screwing up uncomfortable, you’ll be less likely to do it again.
If you’re still wasting money after three months on the cash budget system, you can consider alternatives. The point of using cash is to stay on budget and stay focused on your goals. If cash is not helping you do that, consider the other budgeting methods available, such as an app or a spreadsheet.
What Should I Do With Any Money That’s Left Over At The End Of The Month?
A common question I get asked about the cash envelope system is what to do with money that’s left over at the end of the month. The answer is that it’s really up to you what you do with it.
- You can move it to another category.
- You can leave it where it is and have extra if needed for the next month.
- You can adjust next month’s budget so that you add less if it’s not needed.
- Or you can just carry a surplus in case you need it later.
If you’re consistently having extra money left over in one category, you should evaluate the amount you’re adding to that envelope. If you don’t need that much then adjust it and move it to something else.
What Do I Do When I’m Out Of Cash In An Envelope?
When you run out of money, stop spending in that category.
There may be times that you just forgot something and need to pay for it anyway. You can adjust your budget and take the funds from another category. Just don’t make a habit of this. Your money will disappear without you knowing where it went.
Remember, the point of using the cash envelope system is to save money so that you can reach your bigger goals. If you’re constantly overspending, even when using cash, then you need to evaluate the root causes of that behavior.
You may need to adjust the budgeted amounts, or you may need to figure out why you’re buying things you don’t need or have enough money for. I find that there’s usually a psychological reason for overspending, rather than a budget or income issue.
The important thing is to not use debt to cover it.
So, if you have to move money around within the envelopes, it’s not that big of a deal. Now, if you’re having to move money around all the time, you should sit down and evaluate your budget more.
Still be proud of yourself for using cash and not a credit card! That is a huge accomplishment and better than 80% of the population!
I Shop Online. How Do I Use Cash For That?
There are a couple of ways you can handle online payments. Some people suggest getting Visa gift cards, but I rarely find an online merchant that will take them. So, I don’t recommend this.
- You can keep a strict record of what you spend in that category and take it out of your cash to put back into the bank.
- You can also set up different online checking accounts for those spending categories. Then use a debit card from that account. I do this for some categories and it’s easier than cash for some things that I want to buy online.
The biggest thing is to not use debt to pay for your online purchases.
You can also immediately take the cash out of the envelope and create a new envelope for funds to be taken back to the bank.
The important thing is to not use your debit or credit card online and still spend the cash in other places. That will leave you with a big hole in your budget. So if you shop online for a category you’re using cash for, be sure to set it aside and take it back to the bank.
What If My Spouse Does Some Of The Shopping?
This is another very common question. It does take some practice and teamwork. You will have to still be intentional with the cash and not waste it. If you know your spouse will be going to the grocery store, give them that envelope. Only give them the cash for what they need.
You can also have your spouse keep a small amount of one category in case they need to stop and get milk on the way home. You can also have your spouse carry a small amount of miscellaneous money in case they need to grab something without the envelope.
What Envelopes Should I Use?
There are many different options for cash envelopes. I used a dollar store coupon organizer for years. It held up really well, surprisingly. Once I had my fully-funded emergency fund, I ordered a custom cloth envelope wallet from Etsy.
There are paper envelopes you can order straight from Dave Ramsey. You can also print off free templates from Pinterest. I have also used plastic pencil binder holders and manilla envelopes.
It really doesn’t matter what you use as long as it helps you stick to the budget. Whatever works for you is fine.
There are even envelopes that have coupon dividers that are perfect for cash envelopes. It doesn’t have to be a literal envelope.
Anything that keeps your cash organized for different categories works.
What Are Some Alternatives To Cash Envelopes?
There are some alternatives to cash envelopes, but remember that cash will help save you money overall.
One alternative is using multiple bank accounts for certain categories.
Some people will put the money on a gift card instead of cash. You can also use an app or spreadsheet. There are several budgeting apps, including Dave Ramsey’s app, Everydollar, YNAB and Mint.
You could also keep track of categories in a spreadsheet. This is more work but if that works for you, then it works.
Related: Learn about the best personal finance apps for budgeting, saving money, investing and more.
What I Use
I use a combination of all the options I’ve talked about. I have a spreadsheet, multiple savings funds, and a cash envelope wallet. I use a Luxe Wallet cash wallet system with envelopes that I sell in my shop.
Since I started working at home, I haven’t been able to get to the bank every payday. I now have to drive 12 miles out of my way to go to the bank. This has made it harder for me, but I’m still able to do it (or make adjustments).
I keep cash for local shopping. I use a card for online spending and track it in my spreadsheet. I have multiple savings accounts for long-term and periodic funds.
The important thing is making sure you stay on top of your spending and budget.
Dave Ramsey’s Envelope System — Final Thoughts
Cash helps you stick to your budget and not overspend.
Using cash envelopes doesn’t have to be time consuming or complicated. Once you get in the habit of doing it, you will likely prefer it over debit and credit cards. It doesn’t matter what system you use as long as it works for you.
We all learn and process information differently. As long as your particular cash envelope method is working for you, then keep doing it. If your budgeting system is not working, reevaluate what you’re doing and why it isn’t working.
The important thing to remember is to keep trying. Don’t give up because you failed one month. It takes up to three months to build new habits. Give yourself some time and keep going.