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If you spend any amount of time researching how to budget, particularly when you’re on a tight budget, you’ll get endless recommendations that you should use a cash envelope system to track your spending. I completely agree that a cash envelope system is an amazing way to hold yourself accountable in your spending habits and maintain tight margins. That being said, I have never used the cash envelope method. I hate carrying cash around with me, so I implemented a cashless envelope system that has worked really well for my family.

Using the cashless envelope system follows the exact same principles as the cash envelope system but without carrying a month’s worth of spending money around with you.

What is the Cash/Cashless Envelope System

If you prefer to use this system with cash, go for it! I’m going to explain how to use the envelope system regardless of whether you want to use cash or not.

The envelope system is wildly popular and great for people who are working with extremely tight margins, because it makes spending within your variable categories much more tangible. You are tracking your spending every single day and every time you spend ANY amount of money. It is a great way to prevent that end of the month shock where you’re asking yourself where all your money went.

All of your fixed expenses for the month such as utilities, insurance, housing, etc. can be planned for and set to auto pay easily. But what about all of those ‘other’ expenses that have you pulling out your wallet every single month? These are your variable expenses each month. Variable expenses are the things that you can have the greatest impact on, because you choose how much you spend based on what’s leftover after all of your fixed expenses have been covered. Variable expenses include things like:

  • Groceries
  • Dining Out
  • Entertainment
  • Beauty (ie. nails, hair, lashes, makeup)
  • Clothing
  • Home Depot trips

Basically, variable expenses are things that you can reduce or eliminate in your budget. Most of the items on this list are optional depending on the wiggle room in your budget. Obviously you can’t eliminate groceries altogether, but you can cut your grocery spending if necessary based on other expenses throughout the month.

For me, I create a monthly budget calendar a few days before the upcoming month to get an overview of my financial picture for the month. Once that’s completed, I create a budget for EACH PAYCHECK during that month. I prefer to budget by paycheck rather than create a budget for the entire month.

Related: Paycheck Budgeting: The Budgeting Method that Changed My Family’s Life

Free 25-Page Ultimate Budget Binder

For each paycheck, I calculate how much I have leftover for variable expenses and create a budgeted amount for each category. I try to keep my categories as simple as possible so that I’m not managing twelve envelopes. For my family, I keep envelopes for:

  • Food: This includes both groceries, dining out, and consumable products (ie. paper towels, personal care products, etc)
  • Entertainment: This includes things like family movie days, zoo trips, the carousel at the mall, or anything else we do for fun on the weekends as a family.
  • Miscellaneous: This envelope is for things like Home Depot trips, random Amazon purchases, home organization items, etc.
  • Work Lunches: Even though this falls in the ‘food’ category, this is my husband’s budget for lunches at work.

I literally keep it this simple since everything we spend outside of our fixed expenses falls within these categories. Your categories may look very different, and you may need 6-8 envelopes.

I recommend looking at your spending for the past 3 months and putting everything into as few categories as possible. It just make things so much easier to track.

Related: The Ultimate Budget Planner for Assessing Your Finances and Creating a Plan

How to Implement the Envelope System

Now that you have assigned everything to simplified categories, you can allocate a specific budget to each envelope. If you’re using actual cash, go to the bank right after you receive your paycheck and withdraw the cash you need for each envelope.

If you’re using a cashless system, you have two options:

  1. Set Up Bank Accounts Specific to Your Categories (in my case that would be 3 different checking accounts for my 3 variable expense categories).
  2. Keep all of the money in one account and just track your spending as you go.

Either way, this allows you to utilize the same principles as the cash envelope system, but you don’t have to worry about the risks of carrying large amounts of cash with you. I personally was always so nervous I would drop my cash envelope or my purse would be stolen.

Even though I don’t carry actual cash around with me, I do keep categorized envelopes with me. I track my beginning balance and money spent within this category on the envelope. Once I hit zero, I can’t spend any more money from that envelope. Tracking the numbers as I go has the same impact on me as watching the cash actually disappear from the envelope.

I like to store receipts in the envelope so that I can update my budget when I have the time. I don’t always have time to write things down and calculate balances in the moment. The envelope helps me keep everything in one place. It’s also a great way to keep receipts organized if you are using a cash back app like Ibotta.

How to Use This With Two People

There isn’t necessarily one right way to handle the envelope system between two people. This is where you may have to have more envelopes than my family. In general, I do all of the grocery shopping and we eat out together as a family. If my husband goes to the grocery store, he just gives me the receipt or I go online to grab the amount he spent.

The same goes for entertainment since it’s not often that we do things apart from each other. If I was to go out with girlfriends, then I would just track this myself on the one envelope. You may choose to have “her fun” and “his fun” envelopes so you can keep things separate.

Miscellaneous is the only one that can get out of hand if we’re not careful. That’s truly where communication and weekly money meetings come into play. You’re going to miss things in real time. That’s why it’s important to establish a budget routine that helps you catch up quickly. I personally spend about 10-15 minutes per day on our budget.

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Resources That I Love

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Ibotta: Ibotta is my favorite app for saving money on groceries without clipping coupons. Get cash back on your groceries just by uploading your receipts.  Get $5 just for signing up when you click on my link.


Sarah Nichols

Sarah Nichols, founder and CEO of Let's Talk Mom Business, has a background in business, research, advocacy, and family finances. LetsTalkMomBusiness.com combines her Masters in Business Administration (MBA) and her love for budgeting and frugal living to help others take their family finances into their own hands by teaching budget basics, how to earn income from home as a mom, DIY tutorials, and frugal fun.

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