Cash envelopes

Sometimes friction in a product is a feature, not a bug.

Payment technologies are designed around reducing the friction in payments—from credit cards to Paypal to contactless, each step makes both the spending decision and the payment process simpler. But for some people, this leads to spending more than they’d like to. For many, counting down with debit cards leads to much better spending behavior than counting up with credit cards.

An increasingly popular solution to this problem is the “cash envelopes” strategy: setting a budget, then withdrawing enough cash to pay for it, and putting cash in an envelope that corresponds to the spending category. This is part of a broader category of friction-as-a-feature products, among products like screen time monitors that stop users when they’ve spent too long staring.

Meanwhile, Amazon listings for cash envelopes, budget binders, and related products are soaring. And like many self-improvement related searches, interest in cash envelopes peaks during New Years Resolution season, in early January.

The cash envelope approach is partly a mental hack as giving up physical cash feels like losing something, so consumers think twice about spending it. It’s a response to the fact that credit cards and other payments are designed to feel almost like free money; some cash envelope users say that moving money from one envelope to another feels like borrowing, even though it just means spending money they’ve already earned.

One surprising reason cash envelopes are more popular is that even though cash is getting less common, it’s also becoming less of a bad deal. In the early 1980s, short-term certificates of deposit could yield up to 18%, meaning that holding cash instead of keeping money in a bank account was an expensive proposition. Now, with bank accounts generally offering under 1% returns, the cost of foregone interest is a rounding error—while the cost of overspending is all too real. Budgeting has been on a multi-decade upswing in the US, as the decline of defined-benefit pension plans and the rise of self-managed retirement plans puts more control in the hands of individual savers, but also forces them to make hard decisions if they’re going to achieve financial freedom.