Cash envelopes are a budgeting method where individuals allocate a specific amount of cash for different spending categories, such as groceries, entertainment, or transportation. Each category has its own envelope, and once the cash in an envelope is spent, no more money can be used for that category until the next budgeting period. This system helps people manage their finances by providing a tangible way to track spending. By using cash instead of credit or debit cards, individuals can avoid overspending and gain a clearer understanding of their financial habits.