You can apply the 'cash envelope' system to credit cards to stay on budget without sacrificing rewards — you just need some discipline.

woman opening wallet

  • The
    cash envelope system
    is a popular way to budget, since it
    limits your spending to the money you put in different envelopes
    for each category of expenses.
  • While using cash can definitely be advantageous, especially for
    sticking to a budget, if you want to earn rewards on your spending
    you could apply the envelope system to credit cards. This gives you
    the opportunity to earn cash
    or travel rewards for each dollar you spend.
  • You just need discipline. With rewards
    credit cards
    , you won’t simply “run out” of available credit
    like you would run out of cash. And if you wind up overspending,
    you could end up paying a ridiculous interest rate on your new
  • Read
    more personal finance coverage.

As the author of a book on budgeting, I have a lot of strong
feelings about the best ways to get the job done. My book,
Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll
, focuses on the zero-sum budgeting method, which asks you
to assign a purpose to every dollar you earn each month to reduce

When you give each dollar you earn a job, you also become more
intentional about the way you spend the money you’ve worked so hard
to earn. As a result of using a zero-sum budget, many people find
themselves spending less on things that don’t matter to them and
saving a whole lot more.

While budgeting usually works best when you switch to cash and
avoid the perils of using credit cards, you don’t absolutely have
to steer clear of plastic. In fact, you can use credit cards in
conjunction with any type of budget, including one that relies on
the cash envelope system.

Keep in mind that we’re focusing on the rewards and perks that
make these credit cards great options, not things like interest
rates and late fees, which can far outweigh the value of any

When you’re working to earn credit card rewards, it’s important
to practice financial discipline, like paying your balances off in
full each month, making payments on time, and not spending more
than you can afford to pay back. Basically,
treat your credit card like a debit card

What is the cash envelope system?

The cash envelope system works exactly how it sounds like it
would. You take the amount of money you’ve set aside in
discretionary spending categories like groceries, entertainment,
gas, clothing, and dining out, and put the money in envelopes
designated for each.

For example, let’s imagine for a moment you’re using a zero-sum
budget and plan to spend the following amount in these categories
for a specific month:

Groceries: $700
Gasoline: $200
Entertainment: $300
Dining out: $200
Self-care: $200

In this case, you would take the money you needed in cash from
the bank for each category at the beginning of the month and place
it in a marked envelope. The idea behind the cash envelope system
is making sure you stay on track with the amounts you budget in
each category, so you would spend the money in each envelope down
until it’s gone.

Read more:
3 go-to strategies to make budgeting less complicated, less
stressful, and easier to stick with

What happens when you run out of grocery money on the 20th of
the month? That could mean having to dig deeply into your pantry
and freezer instead. Find yourself out of cash for restaurant or
entertainment spending on the 25th? That means you don’t get to
dine out or hit the movies toward the end of the month since you
spent too much at the beginning.

Over time, the cash envelope system intends to teach you how to
be more intentional with your spending, reduce waste, and leave
more money in your bank account to save and invest. It certainly
sounds harsh, but you do get used to it.

How to apply the cash envelope system to credit cards

No matter what anyone says, you absolutely can use credit cards
and stay on budget. You just need to be considerably more
disciplined to say on track.

To successfully use credit cards alongside a monthly written
budget, all you have to do is use your card instead of cash for
regular bills and purchases you make in discretionary categories
like groceries, dining out, and entertainment. The self-discipline
aspect comes into play because, unlike cash in envelopes, a credit
card won’t simply “run out” unless you hit your credit limit and
have your purchases denied.

Let’s imagine for a moment your goal is earning rewards. In that
case, you may want to consider different credit cards that align
well with the categories you spend the most in. For example: 

  • Groceries: You could consider the
    Blue Cash Preferred® Card from American Express
    , which offers
    6% back on up to $6,000 spent in US supermarket spending each year
    (then 1% back) as well as 6% back on select US streaming
  • Gasoline: The
    Blue Cash Preferred from American Express
    also gives you 3%
    back on US gas station spending. 
  • Entertainment: Consider the Citi Premier℠
    Card, which gives you 2x points on dining and entertainment in
    addition to 3x points on travel including gas. 
  • Dining out: Check out the
    Chase Sapphire Reserve
    , which gives you 3x points on all dining
    and travel purchases in addition to 1x point on everything else you
  • Self-care: A cash-back
    credit card
    like the
    Chase Freedom Unlimited
     would work well for all your other
    purchases since you earn 1.5% back no matter what you buy.

If you’re eager to use credit cards in place of cash because you
hope to earn rewards on your spending or want a more convenient way
to pay, here are some essential tips to making this strategy

Take stock of your spending every few days.
When you have a set limit you can spend in a variety of categories,
the most important step to take is keeping track of how much you
have spent in all the categories you’re tracking. This should be
easy if you’re using a credit card since your online account
management page will supply details on everything you buy.

Imagine for a moment you signed up for the
Chase Freedom
to earn
5% back on up to $1,500 in bonus categories each quarter
and 1%
back on all other purchases. You could use your card to earn cash
back, then log in to your Chase account every few days to tally up
how much you’ve spent on food, gas, and miscellaneous

Keep a running list of spending in each of your
discretionary categories.
You’ll also need to keep a
running list of spending in each discretionary category so you’ll
have an idea of when you’re getting close to running out of money
each month. If you’re using a written budget, you can add a second
page where you track your spending throughout the month in every
category that’s variable.

Make sure to stop before you hit the limit in each
As you approach your spending limit for dining
out, entertainment, or any other category, you need to have the
internal discipline to stop! Only spend up to the limits in the
categories you’ve settled on ahead of time, and not a penny

Pay your credit card bill on time or early each
Make sure you pay your credit card bill in full by
your due date each month. Not only will this help you avoid credit
card late fees, but you’ll avoid paying interest on your purchases.
This part is crucial if your goal is improving your finances and
potentially “getting ahead” by earning rewards on your

Keep in mind that the top
rewards credit cards
available today charge high interest rates
to make up for their rewards programs. For example, the popular

Blue Cash Preferred from American Express
comes with a variable
APR between 14.74% to 25.74%. It can still be a great deal since
you earn 6% back on up to $6,000 in US supermarket spending each
year (then 1%) and on select US streaming services, 3% back at US
gas stations, and 1% back on everything else, but you’ll only wind
up ahead if you avoid credit card interest like the plague.

Also consider paying your credit card bill multiple
times each month.
If you want to ensure you stay on track
with your budget each month and worry using credit will make it too
easy to spend, you can also pay your credit card bill more than
once per month — even a few times per week. This strategy can be
helpful if you’re someone who needs to see their money leave their
bank account to feel the full effects of your spending.

The bottom line

You can use credit cards and stick to a monthly budget, although
you’ll need to be more careful if you choose this route. Credit
cards do make it easier to overspend or get carried away, so you
have to set yourself up for success ahead of time if you want your
plan to work.

Create a comprehensive spending strategy, place realistic limits
on your spending, and check in to see how you’re doing several
times per week. If you can follow those rules, you’ll have a much
better chance at earning rewards on your spending without racking
up debt.

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You can apply the 'cash envelope' system to credit cards to stay on budget without sacrificing rewards — you just need some discipline.