What Is the Highlighter Method? The First Step Before Starting Cash Envelopes

Hey friends! 👋

If you've followed me for a while, you've probably heard me talk about the Highlighter Method more than once.

And there's a reason for that.

When someone asks me how to start budgeting or how to begin using the cash envelope system, this is one of the first exercises I recommend.

Before we decide how much money should go into our cash envelopes, we need to understand where our money is already going.

And that's exactly what the Highlighter Method helps us do.

You don't need a complicated spreadsheet.

You don't need a fancy app.

You just need your transactions, a few highlighters, and a willingness to take an honest look at your spending.

Let's get started!

🖍️ What Is the Highlighter Method?

The Highlighter Method is a simple budgeting exercise where you use different colored highlighters to separate your spending into categories.

You can use a recent bank statement, credit card statement, or a printed list of your transactions.

Each spending category gets its own color.

For example:

Pink — Groceries
Yellow — Eating out
Blue — Bills
Green — Shopping
Orange — Entertainment or fun money

Your categories don't have to look exactly like these.

Choose categories that make sense for your life and your spending.

Then you go through your transactions one by one and highlight each purchase according to its category.

When you're finished, something really interesting happens.

Instead of looking at a page full of numbers, you start seeing patterns.

💵 Why I Recommend Doing This BEFORE Starting Cash Envelopes

This is the part I really want you to understand.

Sometimes we're excited to start cash stuffing, so we immediately create envelopes.

Groceries: $100.

Eating out: $50.

Personal spending: $40.

Sounds good, right?

But where did those numbers come from?

If you've actually been spending $175 a week on groceries, creating a $100 grocery envelope without first understanding your spending may not be realistic.

Then you run out of grocery money.

You get frustrated.

You borrow from another envelope.

And suddenly you're thinking:

"This cash envelope system doesn't work for me."

But the problem may not be the cash envelope system.

We may have created the budget without understanding our actual spending first.

That's why I consider the Highlighter Method Step 1.

First, we learn.

Then, we plan.

Then, we create our cash envelope categories.

📝 Step 1: Gather Your Transactions

Start with your recent spending.

I recommend using enough transactions to give you a realistic picture of your habits rather than looking at only a few days.

Print your bank statement if that's easiest for you, or print/export a transaction list from the account you normally use for everyday spending.

And yes...

We're looking at everything. 😅

The coffee.

The Amazon order.

The quick Target trip.

The takeout.

The groceries.

The subscriptions.

All of it.

This exercise works when we're honest with ourselves.

And remember, we're not doing this to make ourselves feel bad.

We're collecting information.

🖍️ Step 2: Choose Your Categories and Colors

Now grab your highlighters.

Choose one color for each major spending category you want to track.

Keep it simple in the beginning.

You don't necessarily need 15 different colors and 25 different categories.

You might start with:

• Groceries

• Eating out

• Shopping

• Household

• Personal spending

• Entertainment

• Bills

• Transportation

If you notice another category that comes up frequently, add it.

The point is to make your spending easy to identify when you look at the page.

🔎 Step 3: Highlight Every Transaction

Now go line by line.

Look at each transaction and decide which category it belongs to.

Then highlight it with the corresponding color.

Don't skip the little purchases because you think they don't matter.

Those $5, $8, and $12 purchases can add up.

And this is usually where we start having those:

"Wait a minute..." 😂

moments.

Maybe you thought you were eating out twice a month, but your statement tells a different story.

Maybe you didn't realize how often you were making small online purchases.

Maybe groceries weren't actually the category causing the problem.

That's why we do the exercise.

We're replacing assumptions with actual information.

📊 Step 4: Add Up Each Category

Once you've highlighted everything, total the spending in each category.

For example:

Groceries — $475
Eating Out — $240
Shopping — $185
Entertainment — $90

Now you have something incredibly valuable:

Your actual numbers.

You can see where your money has been going instead of guessing.

And please don't panic if some of those totals surprise you!

That's information you can use.

💕 Step 5: Ask Yourself Some Questions

Now comes the important part.

Look at your page and ask:

Does my spending reflect what's important to me?

Is there a category that surprised me?

Where am I spending more than I realized?

Are there areas where I could comfortably cut back?

Which categories would benefit from having a spending limit?

That last question is especially important because now we're getting closer to creating your cash envelope system.

💌 Step 6: Turn What You Learned Into Cash Envelopes

Now that you understand your spending, you can decide which categories you'd like to manage with cash.

You don't necessarily need a cash envelope for every single category.

Your mortgage probably doesn't need one.

Your electric bill probably doesn't need one.

But categories where you tend to overspend?

Those may be great cash envelope categories.

For example, maybe the Highlighter Method showed you that you're spending much more on eating out than you realized.

You decide that going forward, you want to budget $100 for eating out.

Now you have an Eating Out cash envelope.

When that $100 is gone, that's your visual reminder that you've reached the amount you intentionally set aside for that category.

This is why the Highlighter Method and cash envelopes work so well together.

One helps you understand the behavior.

The other helps you create boundaries going forward.

✨ Don't Use This Exercise to Beat Yourself Up

This may be the most important part of this entire blog.

You might finish highlighting your statement and think:

"I can't believe I spent that much."

Okay.

Now you know.

And knowing gives you the opportunity to make a different decision.

We're not going backward and changing those purchases.

We're using that information to decide what we want to do next.

Budgeting isn't punishment.

It's awareness.

It's planning.

It's deciding where you want your money to go instead of wondering where it went.

🔄 Do the Highlighter Method More Than Once

This isn't necessarily a one-and-done exercise.

You can come back to it whenever you feel like your spending is getting away from you.

Maybe you do it monthly when you're first starting.

Maybe later you only do it when you feel like your budget needs a reset.

You can even compare different months.

Are you spending less on eating out?

Did your grocery spending increase?

Is there a new category that's starting to creep up?

Your budget changes because your life changes.

Checking in helps you adjust.

🎥 Want to See Me Walk Through It?

Sometimes it's much easier to understand this exercise when you can actually see someone doing it.

I created a video explaining the Highlighter Method and how you can use it as the beginning of your budgeting and cash envelope journey.

Grab your bank statement and your highlighters and follow along with me!

WATCH MY HIGHLIGHTER METHOD VIDEO

💖 Your First Step Doesn't Have to Be Complicated

If you're completely new to budgeting and don't know where to begin, start here.

Not with 20 cash envelopes.

Not with a complicated spreadsheet.

Not with an unrealistic budget.

Start by understanding what you're already doing.

Print your transactions.

Grab your highlighters.

Categorize your spending.

Look at your numbers.

Then decide what you want to change.

That's why I call the Highlighter Method Step 1 of starting the cash envelope system.

Before we tell our money where to go, we need to understand where it's been going.

And once you know that?

Now we can start creating a plan. 💕

Have you tried the Highlighter Method before? Leave me a comment below and tell me what surprised you the first time you highlighted your spending. Did you discover a category that was taking more of your budget than you realized?

I would love to hear about it!

Christina, xo
Christina Loves Planning