Cash Envelope System – Pros, Cons & Tips

By | February 1, 2019

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(Last Updated On: May 17, 2019)

What is the Cash Envelope System (CES)?

It is used for variable expenses like groceries, eating out and gas. If you’ve budgeted $140 for groceries each week, you’ll place $140 cash into an envelope labelled groceries.

The aim is to stick to your weekly budget for groceries, by making sure that you spend up to the set limit of $140. You are NOT to take cash from other envelopes to increase your grocery budget.

You may have heard about how the cash envelope system can help you budget well. But are you aware of its cons?

What are the pros and cons of this system?

What do you need to do, to make sure that the cash envelope system (CES) will work well and bring you budget success?

Let’s start with the advantages.

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The Pros of the Cash Envelope System:

#1. You become more careful with your money.

You need to hand over physical dollars whenever you buy something, when using the CES. This makes your money spending more real. Using the CES, you can see also that there is only a limited amount of cash set aside for each area of spending. Being reminded of this fact helps you to become more careful with your spending.

#2. You won’t spend the cash you don’t have.

Using the CES, you are making sure that you are spending only the cash you have, NOT the money you don’t have e.g. by using credit cards. This is taking the correct step towards better finances.

#3. You limit excessive spending in different areas.

You won’t overspend on things like groceries, eating out and gas, because you have already decided on a certain fixed amount on each area e.g. eating out or buying clothing. So, you tend to become more prudent in your spending. A good idea is to read the menu displayed outside an eatery that’s new to you, to make sure that it’s within your budget. Do some mental math and total up the bill before placing your order.

Cash envelope system

#4. You reduce your risk of overspending.

There is a huge risk that you may overspend when using a credit card, because card spending is painless – you don’t see your hard-earned cash being used up. On the other hand, handing over the cold cash from your CE makes you really aware of your diminishing amount of cash, and so greatly reduces your risk of overspending.

Learn how to avoid the supermarket overspending trap!

#5. Your budgeting decisions become more real and concrete

Applying the CES makes your budgeting decisions more real and concrete, compared with just using a spreadsheet or table.

#6. You can use the CES to challenge yourselves to reduce your spending

You can set a goal to cut down progressively on the cash amounts allocated to each spending area.

For instance if you want to reduce your grocery spending per month by $100, you can:

-Choose store brands to save money (provided the quality is similar to dearer brands)

-Cut back on chocolates, candy or snacks like chips – buys that are not needed

-Go for cheaper frozen meat rather than pricier fresh meat

-Eat more vegetables and less meat. Veges cost less, and so you save money.

Veges are of course healthier than meats too. In the long run, your health will be better and you’ll save on medical care as well.

As the Vulcans say, “Live long and prosper!”

If you want to cut down on the amount allocated for gas, you can learn to take steps to improve on fuel economy. Read this very helpful post for top tips to slash your gas bill and other car expenses.

As you can see, the CES can bring many advantages for your finances. But the system has its downsides as well.

The Cash Envelope System can work for you. Why not consider Dave Ramsey’s Envelope below. Start by making an investment in yourself and save money in the long run. Want to find out more? Click on the picture below.

The cons of the Cash Envelope System:

#1. Using cash is not always safe.

Your money at home can get stolen. If most of your cash is on you, and people notice that you carry and use cash, someone can take it away from you.

Someone I know had his cash and phone stolen from his home recently. An unfortunate colleague of mine was threatened and robbed of his cash while on an evening out in the city.

For those of you who are often concerned or stressed about having and carrying cash around, the CES might not suit you.

#2. You need to draw cash regularly

To put cash into your CES, you need to regularly take cash from an ATM or from your bank. This is an extra chore that needs to be fitted into your hectic schedule. Depending on where you live, it might not always be safe when leaving an ATM or bank with lots of dollar bills.

#3. Adopting the CES would mean that you lose out on the cashback reward deals and travel points that many credit cards offer.

#4. The CES means more physical tracking of your expenses is needed.

You need to keep your receipts consistently and go through them regularly. Only then can you confirm what you have bought, and how much you have spent on them.

#5. You need to do more work to keep track of your spending.

Not using a credit or debit card means that you don’t enjoy the convenience of the card bill listing down all your purchases and expenditure.

But wait! Don’t let the disadvantages of the CES discourage you from using it. You just need to know how to make the CES more likely to work well for you.

How to make sure that the CES will work for you

#1. You need a sensible and workable budget

Creating and using a sensible and workable budget are required in order to have success with the CES. The golden rule is to spend less than you earn. Find out more about how to budget and become rich.

#2. You need to ensure value for money

Another thing to ensure is to squeeze more value out of every dollar, by learning clever frugal ways to save more money.

#3. You still need to develop the habit of spending on what is worth spending on.

For example, eating out at a nice restaurant feels good, but it may not be worth the extra spending.

It may result in eating out only once every 6 weeks, compared to being able to afford to eat out three times during that time period, at eateries that are less flash but offer honest food and good cooking and service – much better value for money.

#4. You need to grow your self-discipline to make the CES a success.

It can be tempting to raid the groceries envelope to help pay for entertainment or dining out. But not sticking to the proper CES will derail your chance of making it a successful way to budget your money well.

#5. You need to be motivated to make the CES a success.

What are the goals that your household members share?

Saving for a more secure retirement? Putting aside money for your children’s college education?

How much will you need for each goal? What amount do you aim to save each month to move towards making the goals reachable?

#6. You may need drastic measures to make the CES work.

For some of us, it would help to cut up most of your credit cards, if it’s hard to resist the temptation to use them, because it would sabotage the CES and your goal of eliminating overspending.

#7. You need everyone on board to make the CES work.

Discuss with your other half or household members the CES and agree on the amounts to be set aside in each envelope. Get everyone on board to make sure the CES becomes a success for you.

Aim to take steps to have excess money left in your cash envelopes at the end of the month – use the savings to pay off high interest debts first. You’ll save more when you do this 🙂

Sum up

Now that you know the pros and cons of the CES, it’s good if you can use the information I’ve given you to decide on whether to use the CES.

I recommend giving the CES a try. It can work very well for you if you use the 7 tips above. You have everything to gain, and nothing to lose.

Or have you already been using the CES? How has it been benefiting you?

Do you agree with the pros and cons and tips that I’ve written above?

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