diff --git a/CHANGELOG.md b/CHANGELOG.md
index 514dc676..e86ce33f 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -36,6 +36,7 @@
   - pkg: new `Config` interface type to support new generic `FromViper` config file parsing
 - changed flags `--k3s-server-arg` & `--k3s-agent-arg` into `--k3s-arg` with nodefilter support (#605)
   - new config path `options.k3s.extraArgs`
+- config file: environment variables (`$VAR`, `${VAR}` will be expanded unconditionally) (#643)
 
 ### Misc
 
diff --git a/cmd/cluster/clusterCreate.go b/cmd/cluster/clusterCreate.go
index 89a2fbae..7e977f5a 100644
--- a/cmd/cluster/clusterCreate.go
+++ b/cmd/cluster/clusterCreate.go
@@ -24,7 +24,9 @@ package cluster
 
 import (
 	"fmt"
+	"io/ioutil"
 	"os"
+	"path/filepath"
 	"runtime"
 	"strings"
 	"time"
@@ -72,12 +74,31 @@ func initConfig() {
 
 	// Set config file, if specified
 	if configFile != "" {
-		cfgViper.SetConfigFile(configFile)
 
 		if _, err := os.Stat(configFile); err != nil {
 			log.Fatalf("Failed to stat config file %s: %+v", configFile, err)
 		}
 
+		// create temporary file to expand environment variables in the config without writing that back to the original file
+		// we're doing it here, because this happens just before absolutely all other processing
+		tmpfile, err := os.CreateTemp(os.TempDir(), fmt.Sprintf("k3d-config-tmp-%s", filepath.Base(configFile)))
+		if err != nil {
+			log.Fatalf("error creating temp copy of configfile %s for variable expansion: %v", configFile, err)
+		}
+		defer tmpfile.Close()
+
+		originalcontent, err := ioutil.ReadFile(configFile)
+		if err != nil {
+			log.Fatalf("error reading config file %s: %v", configFile, err)
+		}
+		expandedcontent := os.ExpandEnv(string(originalcontent))
+		if _, err := tmpfile.WriteString(expandedcontent); err != nil {
+			log.Fatalf("error writing expanded config file contents to temp file %s: %v", tmpfile.Name(), err)
+		}
+
+		// use temp file with expanded variables
+		cfgViper.SetConfigFile(tmpfile.Name())
+
 		// try to read config into memory (viper map structure)
 		if err := cfgViper.ReadInConfig(); err != nil {
 			if _, ok := err.(viper.ConfigFileNotFoundError); ok {
@@ -96,7 +117,7 @@ func initConfig() {
 			log.Fatalf("Schema Validation failed for config file %s: %+v", configFile, err)
 		}
 
-		log.Infof("Using config file %s (%s#%s)", cfgViper.ConfigFileUsed(), strings.ToLower(cfgViper.GetString("apiVersion")), strings.ToLower(cfgViper.GetString("kind")))
+		log.Infof("Using config file %s (%s#%s)", configFile, strings.ToLower(cfgViper.GetString("apiVersion")), strings.ToLower(cfgViper.GetString("kind")))
 	}
 	if log.GetLevel() >= log.DebugLevel {
 		c, _ := yaml.Marshal(cfgViper.AllSettings())
diff --git a/tests/assets/config_test_simple.yaml b/tests/assets/config_test_simple.yaml
index 75588924..0d4440fa 100755
--- a/tests/assets/config_test_simple.yaml
+++ b/tests/assets/config_test_simple.yaml
@@ -8,7 +8,7 @@ kubeAPI:
   hostPort: "6446"
 image: rancher/k3s:latest
 volumes:
-  - volume: /my/path:/some/path
+  - volume: $HOME:/some/path
     nodeFilters:
       - all
 ports: