How to get started with the cash envelope system
Our cash envelope planner includes a worksheet with the reasons you want to improve your financial situation. Read this when you are frustrated and forget why you are doing this. There is also a goal sheet with the things you are going to do to cut back on. Add anything you personally can do to cut back on your expenses.
Step 1: Set a Budget
1.Determine your Income
List all sources of income and calculate your total income. Make sure that this income is after taxes (i.e. the amount you can actually spend or save).
2.List your Expenses
Before you start, you have to set a budget. Our budget templates will come in handy for this step. Go back six months and check how much you spent each month. Go through your bank account, your checkbook, and your credit card statements.
Our budget sheet template printables include some standard categories for home expenses. If you would like to use different categories then choose a Word or Excel template and edit the category names. Record every expense in the relevant category. If you are checking your expenses from January to June but have many expenses in December for Christmas gifts, then add those too. Add in any expenses that you know you have throughout the year that were not included in your budget.
Once you have your total budget, compare it to your earnings. Can you afford to spend what you are spending? Can you cut costs? Do you have money left to save? If you are not sure how much you should be saving then see our savings tracker and templates.
Make a note of bills that are easier to pay by credit card than by cash. Each month you will leave this sum in the bank to take care of those bills. Our free printable cash envelope system template has a section to record these bills.
3. Set a Savings Goal
By now, you should know how much money you have each month and how much you spend. Assuming your income is higher than your expenses, the difference will be your savings goal. If you feel like you can cut back on expenses then increase your savings goal and reduce your expenses to a reasonable amount that you can commit to.
If your income doesn’t cover your expenses, you will have to set new expense goals and work out where you can save. If you eat out a lot, you can start cooking. If you spend too much on a gym membership you might need to cancel it. Do whatever you need to in order to ensure your expenses will be lower than your income. Be ruthless if you need to be. You cannot spend more than you have. See the worksheet on ways to cut back.
At the end of the period, go back and write your actual savings. If you stuck to the system, it should be equal to or higher than your savings goal.
Step 2: Select Categories
We have two budget worksheets you can print. One has six categories and one has eight. If either of them work for you then use them. If not, then use the Word version or Excel version and change the categories.
Step 3: Set a Budget for Each Category
If you are paid weekly then you will put cash in each envelope each week. If you are paid monthly then can put cash in each envelope each month or you can put a quarter of the amount in each envelope each week. This will ensure you have only the amount available for one week at a time. You don’t want to deplete your budget in the first week of each month.
Write a budget for each category. We suggest you print the weekly budget template 4 times for each week of the month. Make a note of the bills that will need to be paid each week. How much each bill will be and when it will need to be paid.
Create a schedule of the bills you pay each week or month. See our bill payment template. Print a bill tracker template and check off the paid bills to ensure that none go unpaid. If you are on a tight budget and don’t want to print a new sheet each month then insert it into a plastic cover and mark the paid bills with a marker. You can wipe it and reuse it as often as you want.
Step 4: Get envelopes and Prepare Them
Prepare the envelopes and write the category name on each one.
If you have envelopes you can use ready-made ones. If you want to save time and money you can use old envelopes from old bills or letters. If you are into DIY and love pretty envelopes, then use our cash envelope templates to create envelopes with each category on them and a budget on or in the envelope. Some people find it easier to stick to the system when they have pretty envelopes that motivate them. Our free printable envelope templates have motivational quotes on them to keep you inspired and motivated.
Make an extra envelope for an emergency fund. Try to put as much as you can in this envelope each month. Ideally you want to save 3 to 6 months living expenses to have in your emergency fund. Don’t keep this envelope with cash in it if you will become tempted to use it. Put it in the bank in a savings account as soon as you save enough to deposit. Keep adding to the savings account until you save enough for your emergency fund.
If you have big expenses once a year such as a family vacation or Christmas gifts then make an envelope for this and put money in it each month. Deposit it in a savings account until you need it if you will be tempted to use it.
Cash Envelope Template
8 Different Categories + 2 Blank Envelopes for Any Category
You can print the blank template on colored paper to save ink.
Step 5: Put Cash in the Envelopes
Work out how much money goes into each cash envelope and write it down. You can write it both on the spreadsheet and on each envelope.
When payday comes, if you are not paid in cash then go to the bank and withdraw cash according to the denominations you need (see the spreadsheet below). Before you go, figure out how many dollar bills you will need for each envelope and write it down. This way, when you go to the bank to get the cash, you will know exactly how many bills to ask for.
Distribute the cash into the envelopes, according to how much you allocated for each envelope.
Play by the rules. Use only cash for expenses that are supposed to come from your cash envelopes. Don’t use your credit card.
Step 6: Reevaluate Your Expenses and Savings Periodically
After the first period (week or month) evaluate your system. Did you have enough in each envelope? Do you need to make any adjustments? Did you over budget or under budget in any category. Go back to your budget sheet and make adjustments accordingly. Keep doing this and fine-tuning your budget until you are sure that your budget is accurate. This might even take a few months to do. You will get it right eventually.
Add envelopes if you need to. You might suddenly need to repair something, give a gift, or make a payment that does not fit into any of the other envelopes. Even if an expense fits into a specific category you might prefer to make a dedicated envelope for it even if it is a one-time expense. Make your system work for you!
Can you borrow from an envelope? Don’t make this a habit but sometimes it might be worthwhile. For example, if there is a sale on something that you know you would have bought at a later stage and you can buy it cheaper now. If you have extra money in one envelope, you can borrow and replace it when you can. If you have an opportunity to save on one expense and postpone another, then it makes sense financially. Just make sure you don’t do this to buy things that were not on your original budget because then you basically defeat the purpose and the cash envelope system will not work for you. Be honest with yourself. You are doing this for yourself.
Shop around and check prices online. One of the easiest ways to save is to buy the same products at a cheaper price. There are always price differences between stores and finding the cheapest store is a great way to save. If something is on sale and you know you will buy it at a later stage for more, then stock up. Freeze it if you need to. Just make sure you are not tempted to buy things you wouldn’t usually buy and are not part of your budget.
When you go shopping always go with a list. When you buy with cash, you will need to know how much things will be to ensure you have enough. That’s the point of the cash envelope system. Gone are the days when you buy what you want and charge the credit card. See our shopping list template with prices. You might want to use an Excel version and work out how much it will cost before. You can also use any other version and calculate the total yourself.