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Dave Ramsey's Envelope System Explained

Want to keep more of your hard-earned cash? Try keeping your money in cash envelopes. 

Ramsey's cash envelope system is nothing new—it’s been around for decades. But some people still don’t know exactly how or why it works. Let me show you! (And if you hang with me until the end, I’ve got a big announcement that makes using cash envelopes more fashionable than ever.)

What Is Dave Ramsey's Envelope System?

The envelope system is a way to track exactly how much money you have in each budget category for the month by keeping your cash tucked away in envelopes. At the end of the month, you can see how much cash is left by taking a quick peek in your envelope. How easy is that?

If you’re constantly going overboard in a certain category (hello, food!), then take cash out for the amount you’ve budgeted for and stick it in an envelope. When you shop for that category, only use what’s in the envelope. Once the money is gone, it’s gone—so this will force you to stop overspending!

How the Envelope System Works

One of the reasons we overspend is because there’s nothing telling us when to stop. That’s where your cash envelopes come in. They work as a great tool to help you stick to your budget. Here’s how to use them:

1. Think of the budget categories that need a cash envelope.

It’s a good idea to use the envelope system for items that tend to bust your budget. Think of things like groceries, restaurants, entertainment, gas and clothing. 

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You get to decide which budget categories get an envelope, but here are a few I find most helpful:

  • Groceries
  • Restaurants
  • Gas
  • Medicine/pharmacy
  • Hair care/makeup
  • Car maintenance
  • Personal
  • Entertainment
  • Gifts

2. Figure out your budget amount.

If you know you tend to overspend on things like baby showers, birthdays and impulse buys, then look at limiting that to a certain amount for the month. If groceries are always zapping your cash, figure out how much you want to spend on them and then stick to it!  

Make sure you and your spouse are on the same page with the budget amounts. And if you’re single, recruit an accountability partner who is committed to holding you to your budget. This could be a friend, family member or coworker who you trust and know is on board with the money principles you’re putting into practice.

3. Create and fill cash envelopes for the budget categories.

Let’s say you’ve budgeted $500 a month for groceries. When you get your first paycheck of the month, take out $250 from your bank account and put the cash in an envelope. On that envelope, write out Groceries. When you get your second paycheck, do the same thing again and put that $250 in the envelope. That’s your $500 food budget for the month.

Make sure you take enough money with you to cover your groceries for that trip. If you take $150 cash and your total comes to $160, take some things out of the cart and put them back. I know, I know—it’s hard! But it’s better than going over on your grocery category and busting your whole budget for the month!

And on the flip side, if you don’t spend all of the money from the groceries envelope when you’re at the store, make sure you put any change you get back in the cash envelope.

No money—and I mean zero money—comes out of that groceries envelope except to pay for food at the grocery store. If you go food shopping and leave the envelope at home by mistake, turn your car back around!

4. Spend only what you’ve put in each cash envelope.

Don’t forget: When your money’s gone, it’s gone! If you want to go to the store but don’t have enough money, raid the fridge for leftovers. Do a pantry challenge! Dig through your pantry to see what you can find to make dinner without having to hit the grocery store. This is a great way to really get intentional about your spending habits!

Advantages to Using Cash Envelopes

  • It keeps you on track.
  • It enforces discipline.
  • It holds you accountable.
  • It makes it pretty hard to overspend.

What If I Pay Some of My Expenses Online?

Here’s the thing with the envelope system: It works better when you’re actually physically walking into a store to make a purchase. Shopping at the grocery store, going out to eat, getting a haircut or oil change are all times when using the envelope system works really well! 

You can still use cash envelopes for online purchases, but it does get a little trickier. Write the amount you’ve budgeted for on the outside of the envelope and don’t spend more online than the amount you’ve jotted down. Keep track of how much you’ve spent and write it on the back of the envelope, just like if you were balancing a checkbook.

What If I Run Out of Money in My Cash Envelope?

Be careful not to borrow from the other cash envelopes. When it comes to the envelope system, it can be really tempting to shuffle cash from one category to fund another.

Let’s say you used up all the money in your restaurants envelope—don’t be surprised if some inner voice tells you to grab your clothing envelope.

Remember, the whole purpose of using cash envelopes is to control your spending and help you stick to your budget.

If you run out of restaurant money, eat leftovers instead of going out. If you see your gas money slipping away faster than you planned, limit your trips or start carpooling to work. Find creative ways to make your money stretch when the envelopes are getting low! 

What About Emergencies?

If you have a crisis come up in the middle of the month or something happens and you have absolutely no choice but to shift your envelope funds, call an emergency budget meeting to talk it through.

If you’re married, talk with your spouse and figure out the best course of action, adjust the budget, and agree on it together. Both of you must be involved—it’s a joint decision. Or if you’re single, run the amounts by your accountability partner to get their input. 

What If I Have Money Left at the End of the Month?

If you have money left in an envelope at the end of the month, congratulations! You came in under budget! That’s the best feeling in the world. And it’s okay to celebrate too . . . within reason.

Reward yourself by going out to dinner or grabbing a pumpkin spiced latte. Or roll the money over to next month so you have an extra-large food budget. Rewarding yourself is important because it helps keep you motivated. You have to celebrate those little wins along the way!

And if you’re in Baby Step 2, take that extra cash and put it toward your debt snowball. Every little bit helps!

Remember, cash envelopes are powerful weapons in the fight against overspending. They can help you manage your money better than you ever have. Put the Ramsey envelope system to work for you and get intentional about how you’re spending your money! 

Okay guys, since we’re talking about the envelope system, I’m so excited to share some news. For a while now, I’ve wanted to design a beautiful wallet that empowers you to use your cash envelopes and budget the way you want to. And it’s finally here!

Here are some of my favorite things about the wallet:

  • Four interior envelopes for cash
  • 10 debit card/gift card slots
  • A zippered coin, coupon, or receipt pouch
  • Soft genuine leather that will last years and only grow in character as time passes
  • Wristlet with zip-top closure
  • A wallet that helps you budget and fits your lifestyle

This Is So Much More Than a Wallet

To create this wallet, I’ve partnered with JOYN. They provide fair-trade jobs to vulnerable locals in India so they can have dignity, livelihood and a future.

So, while you’re saving money and working to change your family tree, so is each person handmaking this wallet. As much as I believe using these wallets can change your life for the better, I know it will do that for the people making them as well. Get yours today!

Rachel Cruze

About the author

Rachel Cruze

Rachel Cruze is a two-time #1 national bestselling author, financial expert and host of The Rachel Cruze Show. She has appeared on Good Morning America, Today and Live With Kelly & Ryan, among others. Since 2010, Rachel has served at Ramsey Solutions, where she teaches people how to avoid debt, save money, budget and win with money at any stage in life. Learn More.

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