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How to Use the Envelope System Without Cash

Budgeting is something near and dear to my heart, and there is no shortage of tricks and tips for crafting, and sticking to, a budget. 

One budgeting hack that many of the older members of my family have used, with great success, is the envelope system.

But, this particular method is one that I have largely stayed away from because of its dependence on using cash. I get paid via direct deposit and almost all of my spending is done using credit cards. Heck, I might visit a brick-and-mortar bank like 3 times a year. 

Recently though I started wondering if there was a way I could implement the envelope system without cash?

Surprisingly the answer is yes. You can still use the envelope system, or at least a variation of it, to help you budget in a modern world that often doesn’t even accept cash. 

envelope with cash

What is the Envelope System?

The envelope system was designed as a way to help you budget your variable expenses. Variable expenses often include discretionary spending like eating out, purchasing clothes, going to a concert, etc. 

To use the envelope system, you need to set a monthly spend limit for each category of variable spend and put the appropriate amount of cash in a labeled envelope. And each time you purchase something in that category, you use money from the appropriate envelope. 

For instance, let’s say you want to limit your dining out to no more than $200 a month. You would need to take $200 and put it in an envelope labeled dining out. And each time that you eat out, you would pay the bill only with money from that envelope. 

When an envelope runs out of cash, you are done for the month. So if your dining out envelope runs out of cash on the 18th of the month, then you can’t eat out again until the 1st of the next month (when the money in the envelope is replenished). 

Having an envelope for each category of spending and using the envelopes to track expenses are the key concepts behind the envelope system of budgeting. 

How Does the Envelope System Help You Budget?

Using the envelope system can help your budgeting in two key ways: organization and accountability. 

Having a tangible envelope, or other way of categorizing your expenses can really help your budgeting, particularly if you struggle with managing your variable expenses. 

For instance, you could set yourself a $200/month budget limit for eating out, but without categorizing your actual spending, like you can do with the envelope system, it can be difficult to actively track how much you are spending on eating out each month. 

Or, if you struggle with keeping to your budgeted spending amounts for things like eating out, entertainment, groceries, etc. the cash in the envelope can help hold you accountable so long as you stick to only using the money in each envelope. 

The envelope system can also help inform you that it may be time to re-evaluate your budget. 

For instance, if your grocery envelope is always running out of money mid-way through the month, then you might need to look at upping the budget for this category or finding new ways to save money

Or on the flip side, if one of your envelopes consistently has extra money leftover at the end of the money, maybe you can reduce the budget for this category and find a better place to stick the extra cash. 

How to Use the Envelope System Without Cash

Traditionally, the envelope system uses cash. But times have changed since the envelope system was developed. Many people are now paid through direct deposit instead of in cash/check. And much of our spending is done using credit cards instead of cash. 

Using the envelope system the traditional way would now require you to physically go to the bank and draw out the appropriate amount of cash each week/month. And with the advent of mobile banking, this could mean a long drive to an approved ATM or enduring costly ATM fees. 

This makes utilizing the envelope system less feasible. 

But, that doesn’t mean that you can’t still use this method of budgeting, or at least the basic tenets of it, to help track your spending. In fact, you can even still use real envelopes even if you don’t use cash. 

Categorize Your Credit Cards

Instead of using an envelope to categorize your spending, you can categorize your credit/debit cards instead and use them as a sort of virtual envelope. 

For instance, I have one cashback credit card that rewards me on gas station and grocery store purchases and a different credit card that rewards me on dining out and travel. By only using each card for the purchases I get the most cash back on, I am essentially using my cards to categorize my spending. 

You don’t necessarily need a credit card to cover every category of spend you have (who needs 10+ credit cards), the idea is just to find a simple and easy way to categorize your expenses. 

So if you have 3 credit cards, split your monthly variable expenses between all three, but dedicate categories for each of your cards. For instance, use card #1 only for groceries, card #2 only for eating out and entertainment, and card #3 only for travel and clothing purchases.  

This lets your purchase history and statements serve as a sort of virtual envelope. 

Set Limit Alerts

Another great feature that most credit cards and debit cards have is a limit alert. This feature allows you to set a rule that when you reach a certain balance amount, you are automatically notified. I.E. a $500 alert will notify you when your balance hits $501 or greater. 

If you use limit alerts along with categorizing your credit cards, this can be a great way to track spending and the availability of funds for each category. 

So, instead of having a physical envelope that runs out of cash, you now receive a text or email alert when your virtual envelope runs out of funds. Just be sure to put that credit card (virtual envelope) away once you get that limit alert notification. 

Save Your Receipts in Envelopes

Just because you are using a cashless system, doesn’t mean you can’t still implement real envelopes. 

Categorized envelopes are still a great way to store paper receipts. Many envelope system envelopes also come printed with a ledger so that you can record each receipt (paper or otherwise) and the total amount spent. 

This way, you are still using envelopes to track your purchases even though you aren’t using cash. 

Track Your Spending

The most important part of using the envelope system is tracking your spending. After all, having an envelope run out of cash only tells you that you have spent too much money, it doesn’t tell you where or how that money was spent. 

If you are still using physical envelopes, then the actual envelopes with their ledgers and ability to store receipts will be the tool you use to help track your spending. 

But, if you have opted to go with more of a virtual envelope method, then you will need to take extra steps to track your spending. 

This could be something as simple as carrying around index cards to categorize each purchase you make, or as complicated as setting up and utilizing color-coded spreadsheets. 

Whichever method you choose to track your monthly expenses, it is important to stick to it, otherwise, you may struggle to get the envelope system to really work for you. 

Final Thoughts

Whether you choose to use actual envelopes to track your spending or categorize your expenses using virtual envelopes, you can still use the “envelope system” to help you craft and stick to your budget. 

The key building blocks of the envelope system can still help you track your spending in a cashless world, and this tracking is the most important part of budgeting. After all, how do you know if your budget is working, if you aren’t tracking your monthly expenses?

Developing a budget that works for you is a process, one where success isn’t necessarily guaranteed the first time that you try. 

So, if your current budgeting strategy or method isn’t quite cutting it anymore, then maybe trying out this new spin on an old budgeting hack could be the solution to keeping your budget on track.