How to Save Big Using Dave Ramsey’s Envelope System

Find out how this old-school budgeting system can ramp up your savings.

During these times when everyone pays with a credit card — or even their phone — budgeting money can be difficult to master. Having to come up with a budget that actually works is hard enough, but it can be especially challenging with tempting debit and credit card rewards, and solutions like Apple Pay, which allows you to use money out of your savings account without even seeing or touching it.

When the advances of mobile banking start breaking apart your finances, something has to change. Dave Ramsey, personal finance expert and creator of the Financial Peace University, advocates a budgeting method that was used in simpler times: the envelope system. It’s what could help you pay off debt and stay on track.

How To: Budget Your Paycheck Like Elizabeth Warren and Jean Chatzky

What is the Dave Ramsey envelope system?

From the get-go, the idea of using something so outdated as a paper envelope — after all, texting or Snapchatting is so much more efficient — to stay within your budget seems a bit too simple. But that’s exactly the point: Saving money has to be simple in order for you to stick with it long-term.

The envelope system uses labeled envelopes as a way of allocating various budgets throughout the month. For example, one envelope is labeled “Groceries,” while another envelope is labeled “Gas,” and so on. There is no limit to the number of budgets, or money envelopes, you can have.

Once you’ve determined what your budget categories are, it’s time to crunch some hard numbers and establish how much physical cash to put into each. Yes, that’s right: cash. You’ll probably have to head to a bank ATM and take some out. Once you decide on the amount for your budgeted envelopes, that’s the only fund you can use for the entire month; if you run out of cash, there’s no using a debit or credit card as a backup. explained that using cash only when making purchases triggers a pain response in your mind that naturally deters you from overspending. You’re more conscious of what you’re spending if you’re handing over physical cash and not just a credit card; it’s psychological. It might be a bit unnerving to know that you’re deliberately participating in an act that is meant to be painful, but the point is to condition yourself to have greater awareness of what it really means to spend money.

4 Ways to Save Money Using the Envelope Budgeting System

Like any other strategy, learning how to budget using the envelope system requires you to set yourself up for success from day one to see the savings results you want. Here are a few tips to help you stay on track using cash only.

1. Maintain a Zero-Based Budget

The most boring part of any process is often the most important. When determining how much to allow in each budget, accounting for every expenditure is essential. This is called zero budgeting.

What’s also important is calculating how much you’ll need in each budget by adding up how much you’ve spent in the past on bills, such as utilities and groceries — to the penny. Be accurate; rough estimations from the depths of your memory will only harm your ability to budget accurately.

2. Budget Your Money Realistically

You might have big savings goals, but being unrealistic with each budget will be your own worst enemy. If you know you spend $200 on gas every month, which primarily goes toward your daily work commute, don’t set your budget to $150.

In this particular scenario, you’ve already set yourself up for failure since spending $200 to get to work is non-negotiable in most cases.

3. Leave Plastic at Home

When going out on supermarket runs or to a restaurant, a key component to saving money with the envelope system is to leave any debit cards or credit cards at home. Doing this prevents your willpower from buckling at checkout.

If you absolutely must pay for something urgent and unexpected that’s beyond your budget, you can adjust how you’ve divided up your money by pulling money from a more flexible budget, like groceries. At the end of the month, you would have still kept within your total spending budget anyway.

4. Allow Yourself to Have Fun

Too much restriction for the sake of saving money can set you up for failure with the envelope system. For this reason, give yourself permission to set up an “Entertainment” or “Weekend” budget for a few fun activities you can indulge in throughout the month. Soon enough, you won’t even feel like you’re wanting when it comes expenses like treating yourself to a night out with friends.

Jamie Young contributed to the reporting for this article.

  • j.Scholten

    My husband and I have just started the FPU class at our church. We are excited about “making it” financially in the latter years of our life. These above suggestions were most helpful….thanks…

  • nitemarejim

    Why is it the ‘David Ramsey’ envelope system?
    The envelope system has been around a lot longer than David Ramsey.

    I used it when I got married in 1981. My in-laws used it 25 years earlier. Within a month, I realized how unwieldy it was to actually cash our paychecks and dole it out into envelopes.

    Instead, all paychecks were deposited into a joint checking account. I used a business envelope for each budget item and kept a piece of lined paper that added the allocated portion of each paycheck. When a check was written against the account, that money was subtracted from the balance.

    In effect, I was keeping 2 sets of books, the budget and the checkbook.

    Within a few months, I went to the stationary store and bought a real multi-column ledger book and used that instead of the envelopes and sheets of paper. Each leaf was its own budget item, and I kept the checkbook in the ledger. When I ran out of room, I put all those pages into a loosleaf so I could add leafs to each budger item as needed.

  • Amy

    I agree, paying with cash always makes you more conscious of the purchase

    • jill zhang

      Dave Ramsey is great.

      I learned this process from him for getting your finances in order –

      Step 1: Create an emergency account of $1000 to $2000

      Step 2: List all debt SMALLEST to LARGEST, and Pay off THE SMALLEST FIRST. Then, you snowball the payment (once paid off) into the next biggest, creating a SNOWBALL EFFECT.

      Step 3: Save 3-6 months of monthly expenses and at the same time, lower them! Cut car insurance to $25/month (check Insurance Panda), cut gas to less than $50/month (check Gasbuddy), get rid of cable TV (check netflix and aereo), and look to TMobile for cellphone ($20/month).

      Step 4: Stash away 15% of income for Retirement

      Step 5: Save for KIDS’ college savings (at 12%, accounting for inflation rate).

      Step 6: PAY OFF THE HOUSE

      Step 7: Give, Invest, and Spend your Accumulated Wealth

  • Tortoise Banker

    I’ve got to admit, although his advice on investing is a little outrageous his tips on saving and eliminating debt are solid! Thanks!

  • Dave

    Dave Ramsey keeping it basic and simple – nice system of organization. Seems like a cool guy too. Is he?

  • Asif

    PLEASE stop writing articles like this. It’s like a paid promotion.

  • Cate

    How does this work if your check is direct deposit?

    • Kate

      You go to the bank and request cash.

  • Rostand

    Learned in High School that the Credit Card system was not created for the benefit of consumers. Why we haven’t realized that is only because of our need for instant gratification, not unlike small children.

  • the donger

    Dave Ramsey’s policy is to get kickbacks from you buying his recommended high-fee, front-loaded mutual funds.

    • smo360

      Totally wrong

    • Kate

      I got Dave Ramsey’s “Total Money Makeover” book at the library for free, never bought anything else, read all the free info on his website, paid off all debt using his Baby Step system. Very grateful to the man.

  • Deepika Sharma

    I don’t know how it works.