Envelope budgeting, also known as “cash stuffing,” is a popular strategy that requires you to place cash in different envelopes. It’s a hands-on approach that forces you to stick to your monthly budget. We explore how cash stuffing works to help you decide if it’s the right method for you. We also explain how you can use Lunch Money to follow a “virtual” envelope budgeting strategy.
What is cash stuffing and how does it work?
Personal finance guru Dave Ramsey popularized envelope budgeting, though he wasn’t the first to use it. In recent years, the trend has gone viral on TikTok, where it’s referred to as “cash stuffing.”
With cash stuffing, you figure out how much money you will need to cover your expenses during your budget period. Then, after you get paid, you withdraw the necessary amount from your bank account in cash.
You then place the money in different envelopes representing your various expenses. Once the cash in an envelope has been spent, you’ve reached 100% of your budget, and no funds remain for that expense category until your next payday or budget period.
Ultimately, cash stuffing forces you to stick to your budget and makes overspending harder.
You don’t have to use physical cash to follow the envelope budgeting method. You can create virtual envelopes using a spreadsheet or a budgeting app like Lunch Money. But we’ll get to that a bit later!
How to set up an envelope budgeting system
If you want to try cash stuffing, here are the exact steps to follow to set up an envelope budgeting system:
1. Set your budget
Before using the envelope budgeting system, you need to understand where your money is going. You can figure this out by reviewing your bank account and/or credit card statements for the past month (or longer) or using a spend tracking tool like Lunch Money. Set a budget for your various expenses. Your fixed costs, such as rent or cell phone bills, should be straightforward. But what about your variable expenses, like groceries, gas, or eating out? Determine how much you want to spend in each category.
2. Create your cash envelope categories
Once you’ve set your budget, it’s time to create your cash envelope categories. Let’s say your total monthly expenses are $4,500. Here’s how you might divide it into different money envelopes:
- Rent and utilities: $1,500
- Groceries: $300
- Gas: $200
- Phone bill: $100
- Auto insurance: $150
- Savings: $900
- Discretionary spending: $900
- Charitable donations: $450
3. Fill your money envelopes
Once you’ve created your categories, it’s time to withdraw enough cash to cover your expenses and fill each of the money envelopes. For example, you’ll put $300 in the “groceries” envelope and $100 in the “phone bill” envelope. It’s best to fill your money envelopes at the beginning of your budget period. This could be monthly, or if you get paid every two weeks, you could choose a bi-weekly period. That part is up to you.
4. Stick to your cash envelope limits
The next step is critical. When you head out to the grocery store or gas station, take the appropriate cash envelopes with you. But remember, the cash envelope system only works if you stick to your limits. For example, if you run out of funds in your discretionary spending category halfway through the month, you can’t replenish that envelope until the following month. At least, you can’t without pulling from another envelope, but that’s not ideal. Over time, you’ll learn how to pace your spending so you don’t run out of money too early.
How do you envelope budget without cash?
You can follow an envelope budgeting strategy without using cash by applying the same principles using digital tools. Popular budgeting apps, like Lunch Money and others, allow you to create different categories, track spending, and set category limits.
You can also make a spreadsheet using Google Sheets or Excel, with columns for your expense categories and spending limits. However, this strategy will require you to closely track your monthly spending to ensure you don’t exceed your budget. Using a spend-tracking app like Lunch Money can help make things easier by automatically importing and categorizing your transactions as time goes on.
An alternative solution is to open a bank account that supports different sub-accounts that you can assign to various spending categories. At the beginning of the month, your income is deposited in the main account, and then you can transfer funds to each sub-account.
How Lunch Money supports envelope budgeting
Lunch Money’s budgeting features can mimic the traditional cash envelope system. You can create customized expense categories and set a spending limit for each category. You can even assign multiple categories to a category group for better organization. Lunch Money then syncs to your bank account and tracks your transactions automatically.
You can also set recurring expenses for predictable transactions such as rent or car insurance payments. Finally, Lunch Money provides insights into your spending and category performance so you know exactly how you are doing.
Pros and cons of the envelope budgeting method
Like any budgeting method, envelope budgeting has pros and cons. Before you try it out, here are a few things to consider.
Pros
It sets clear spending limits
By allocating money to each of your cash envelopes, you’re setting clear limits on your spending. Once the envelope is out of money, you’ll have to wait until the next month to fund it again. Plus, it’s easier to understand how much is left in your budget when you’re using cash as opposed to spending on a debit or credit card.
It can help reduce overspending
The cash envelope system forces you to become more financially disciplined and stick to your pre-determined budget. It can reduce the urge to spend impulsively or exceed a certain budgeting category.
It increases your financial awareness
Having to figure out how much to allocate to each envelope and which envelopes consistently run out of money will help you improve your financial awareness.
Cons
Limited flexibility
Once you allocate your money to a particular envelope, that’s all you have for the month. This can provide less flexibility if unexpected expenses arise throughout the month. One solution is to move money over from an envelope where you expect to underspend, but it’s not a good habit to get into.
Risks of carrying cash
Carrying around actual cash instead of storing it safely in your bank account can be risky, especially if your monthly budget is several thousand dollars. Besides the possibility of theft, if you lose cash, you have no recourse. If you don’t feel comfortable carrying so much cash, you’ll likely be better off with virtual cash stuffing or another budgeting method.
Who is the cash stuffing envelope system best suited for?
The cash stuffing system is best for those who prefer a hands-on approach to budgeting and don’t mind dealing with cash transactions. Seeing the physical cash divided into different envelopes provides immediate feedback you can’t get from a spreadsheet.
It can also be a good option for new budgeters who struggle with overspending. By carrying physical cash around, you’re forced to stop spending money when it runs out. By comparison, it’s much easier to blow past your budget when paying with a credit card.
FAQs
Here’s some additional information about the budget envelope system.
What happens when one envelope runs out of money?
When one envelope runs out of money, you’re done spending money in the category until the following month. This forces you to stick to the budget you set.
Do you have to use physical cash with envelope budgeting?
You don’t have to use physical cash — you can create digital or virtual cash stuffing categories using a budgeting app or spreadsheet. However, many people prefer to see the physical cash leave their envelopes. It makes them more aware of their spending, which can have a positive psychological impact.
Why is cash stuffing so popular?
Cash stuffing has gained popularity with younger generations thanks to social media platforms like TikTok. It can be a particularly effective budgeting method for impulse shoppers, forcing them to stick to their budget.
