Tips For Using the Cash Envelope Method

It may seem outdated, but cash is king when it comes to gaining control over your spending and saving.

Written by Elaine King CFP® / July 6, 2022

Quick Bites

  • Research shows that when you see and feel the money you are spending, you tend to avoid overspending.
  • The cash envelope method is a simple way to use cash to pay your bills and save for goals.
  • Separating out all the bills you have to pay and allotting cash for each allows you to see clearly where you money is going every month, helping you stay on track.
  • Just like any other saving and budgeting method, discipline is key.

It seems counterintuitive to use cash when we are living in a world of virtual currency, automatic online payments and “paying without payment” transactions such as face recognition and one-click. However, price increases in housing of 30%, gas at 40% and food at 10% due in part to high inflation rates are forcing us to tighten our belts and find creative ways to make things affordable.

Research has found that compared to cash, using money in a virtual way (i.e., credit cards) can lead to an increase spending, and more debt. The oldest theory called “Pain of Paying,” introduced by Ofer Zellermayer.[1] It describes that seeing and feeling the money and being physically present at the time of purchase can intensify the feeling of losing the money and therefore prevent you from overspending.

A creative way to keep us from going over our budget, is the cash envelope method. The original method has been around for ages, in China since 200 B.C to be exact. Back then, paper envelopes were used to send monetary gifts and to separate money. The updated method has been adapted to our 20th century reality and it works best if you follow these tips.

Tip 1: Define your cash envelope needs

Start by making a list of all your obligations for the month on a piece of paper with the amount and due dates. For example: “rent $1,000, every 5th of the month,” utilities $100 every 10th of the month, cell phone $150 every 15th of the month , food $500 ($125 weekly every Sunday), debt $100 every 15th of the month, insurance $150 every 5th of the month, car payments $400 every 20th of the month, etc.

Then label envelopes with each of those obligations and put them in order by due date. For the example above, you will need seven envelopes and $2,000 of cash to stuff in the respective envelopes.

For this to work, you must fill the envelopes according to its due date and amount. The exercise of seeing the cash and touching it to distribute it helps you control where the money goes at the end of the month and make payments on time.

Nashalie Lugo photo

Using the Cash Envelope Method to Get Out of Debt

Using the Cash Envelope Method to Get Out of Debt

Eating out and shopping got Nashalie R. Lugo deeper and deeper into debt—until she tried the cash envelope method, and developed an overall financial plan that works wonders.

Find out more

In case you don’t know all your bills, review your last bank statement, and make a list of the past three months of payments. Your “need” expenses are fixed expenses and you must pay them first before spending on anything else. It is also important to keep these envelopes under a locked key, ideally in a safe box you can keep at home.

Tip 2: Define your priorities beyond your needs

Assuming you stuffed your envelopes under the obligation/need category, any money you have left is for you to spend based on your priorities.

For example, let’s say that from the example above, you have $1,000 left because your income is $3,000 and you used $2,000 to cover for your obligations. With the $1,000 left, I recommend distributing it in seven more categories such as emergency fund, paying off debt, vacation, education, housing, business and retirement.

High-interest credit-card debt should be one of your top priorities for paying off since interest rates are on the rise. Next on that list should be your emergency fund so you have a cushion and can avoid future debt.

I recommend writing on each envelope the goal, the amount, the date and the monthly contribution. For example: “credit card debt $6,000, pay it off in 12 months at $500 a month.” This way, it is clear how much you must put in the envelope ($500 of the $1,000 left).

Then, for the emergency fund, which should total at least three times your fixed expenses, write on the envelope “Emergency fund $3,000, fund in 12 months at $300 a month” and add $300 of the $500 left.

Then the vacation fund with the same format; the more detailed the better. Like “Cancun, $1,200 in 12 months at $100 a month,” and so on. This method works because it allows you to distribute the money you are planning before going out and letting your impulses spend on things that are not in the envelopes.

Tip 3: Be disciplined

For this to work for a long time, you may want to set all your due dates for payments to the first of every month via your bank’s automatic bill pay (you’ll need to deposit the cash for the payments). This way, if you are out of town, bills will get paid.

Also, try to live on last month’s paycheck. For example, if we are in December, use the funds that you received in November; most people get in debt because they live on next month’s paycheck.

It’s important to set a process that works. Build a schedule in your calendar. You should withdraw your paycheck or income as soon as it has cleared in your bank account and then choose one day to make all the payments.

You will probably have challenges in making payments online if you only have cash, so have a separate cash checking account just for those bills. The cash envelope method is something to use to help you build a habit. Once the habit is created, you can start using a bank account for paying bills to replace your envelopes and a savings account for goals you want to reach.

The cash envelope method works because physically handling cash and paying bills will prevent you from overspending, getting into debt and overpaying for goods and services. Avoid using credit cards as much as possible at the beginning. Overall, the cash stuffing envelope method will allow you to be more conscious about your path to financial independence.

Article Sources
  1. “The Pain of Paying,” Ofer Zellermayer, January 1996,

About the Author

Elaine King

Elaine King CFP®

Elaine has served as the Family’s Financial Planner for over 1,200 families and 100 multigenerational family enterprises crafting actionable family financial plans.

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