How To Use The Cash Envelope System
So you’ve decided to get your finances in order, but for some reason, you’re still having a hard time staying within the budget amounts that you’ve set up. This was me. For a while, I couldn’t figure out what I was doing wrong. I would make my budget, every two weeks, according to payday and then set my budget amounts, for things like groceries, restaurant and entertainment, household/yard expenses, etc. and every week, I would fall short. Why?? Well I wouldn’t take the budgeted amount out of the checking account. For some silly reason, I thought I could control the spending, all while leaving it in the bank. Wrong!! It doesn’t work that way. I soon realized that I needed to learn the right way of how to use the cash envelope system!
One problem is that we bank at a Credit Union, in another town, which made it impossible to go each payday and draw the budget money out. It wasn’t until we finally made the choice to open up a checking account at a local bank, that the envelope system started working for us. If you’ll stay with me here, I’ll walk you through the simple steps of how to use the cash envelope system, to get you started.
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How To Use The Cash Envelope System
Start with the Budget
Once you’ve created your budget, decide which categories that will be in the cash envelopes. My categories are groceries/alcohol (yes..we do enjoy a nice bottle of wine on occasion, so I include it in the budget), restaurant/entertainment, household/yard expenses and miscellaneous.
I also have budget categories for auto maintenance (because, let’s face it, cars do break down and it’s almost never a $15 repair.), grandkids, Christmas and cash.
The way this works is say, you’ve set a budget amount of $400 per month for groceries. If you get paid twice a month, then $200 needs to be drawn out each payday and put into the grocery envelope. Do this for each category. If you need help setting up an easy budget, click here.
Tip: The Cash Envelope system works extremely well with the Half Payment Budget Method. When used together, these budgeting methods are a total life changer! Once implemented, we actually found more money in our budget each payday and they allowed use to start digging out of debt, thereby alleviating so much stress!
Choose your system
I actually made my own template for dividers that fit into my wallet. These are my “envelopes”, so to speak. I carried envelopes for a long time, but somehow it was kind of embarrassing when I would be in the check out and I would pull those tattered, worn envelopes out. I imagined every one was staring at them and me. The dividers have worked out nicely for me.
I bought one of those accordion coupon files at the Dollar Tree, for those categories that I don’t need to carry with me in my purse.
It doesn’t matter what envelope system you choose to purchase or make yourself, what’s important is that you find a system that works for you and implement it.
Fill the Envelopes
Once you’ve decided on the amounts for each category, add them up. This will be the total amount you will withdraw from the bank. Be sure to break down each category into the correct denominations so it will be easy to allocate the cash.
Cash Envelope System for Budgeting 12 Pack
When the Money is Spent
When an envelope is empty, that’s it! Finito!! There’s no more to spend in that category. This may take some getting use to at first, but remember why you are doing it. If you take from another category, then you will have less to spend for that category.
Drawbacks to the Cash Envelope System.
Are there any drawbacks to using the cash envelope system? Of course! If a thief steals your purse or wallet, that’s a drawback, for sure.
Going and drawing the money out each payday might also be considered a drawback. It’s so much more convenient to be able to just swipe a debit card, but there’s something about that, that takes the pain out of spending (too much) money.
I’m sure that we could come up with a dozen drawbacks, if we really tried, but there are more positives than negatives to using the cash envelopes system.
Advantages to the Cash Envelope System
There are so many advantages to using the cash system! You’ve heard the old saying, “Cash is King”! Well, it’s so true! In today’s society, some may consider cash to be old school. But if you truly want to get a handle on your finances, this is the way to do it!
Using cash keeps you from overspending. Period. Using cash also teaches discipline. Whether we like to admit it or not, learning to control our finances is a behavioral thing. Every time you reach for an envelope, you’re reminded of how in tune you are with your budget. Therefore, you are less likely to spend wastefully. Cash makes you think about every purchase. The fact is, people spend 10-15% less when using cash.
Some Tips On How To Use The Envelope System
- Make sure to involve the whole family in this system. Without doing so, it’s going to be very difficult to stick with it. Whether you have a single income or a double income, both spouses have an equal say in how the money/envelopes will be divided up. As far as the kids are concerned, give your children some input on categories and amounts. Explain to them if they need something, like a pair of new shoes, you need to decide on an amount and they need to pick something out at or under that amount. Once they’ve spent the budgeted amount, there is no more. It’s also an opportunity to a wonderful teaching moment. Teach them early the responsibilities of handling money.
- Be sure to include a “fun” or “date night” envelope. A budget is much easier to stick to if there are little rewards along the way. Of course, it needs to be within reason and what your budget can afford.
- Set some goals. In order to be successful with budgeting and having your spouse on board, you need a “why”. If you have a reason for doing something, it makes it so much easier. Maybe you’ve been wanting to take an awesome family vacation. Maybe you want to upgrade to a newer car. Whatever the reason, having a goal in sight is a big motivator for most people. When your goal is clearly defined and visible, it’s like the proverbial carrot that is dangling out in front of you.
- Start out with the basic categories, like Groceries, Eating Out, Entertainment, Gas, Kid Expenses, Household/Yard or whatever you’re having a hard time keeping under control and are over spending on. If you’re just starting out using this system, maybe just start with 3-4 categories and see how well that works for you. You can always add more.
- Use the Cash Envelope System in conjunction with the Half Payment Budget Method! These two systems go hand in hand and work fantastic, together!
- Listen to Dave Ramsey, especially if you need motivation. I’ve been listening to Dave for years and his methods truly work! Like I said above…my method wasn’t working too well. When I finally got smart and started implementing this system the way he said to do it, it worked! Imagine that!! (If you don’t have it, I highly recommend his book, The Total Money Makeover)
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness
Finally…
It may truly seem “old school”, in this day and age, to carry around envelopes of cash. Though, whatever it may be, it works! Once you are out of cash and you don’t have your plastic to fall back on, it will be impossible to overspend.
Do you use the Cash Envelope System? What tips do you have?
PS..Be sure to subscribe to Love To Frugal, so you don’t miss a thing! Also, check out 14 Ways To Pay Off Debt and Get Your Life Back and 8 Simple Steps for Setting Up a Budget if you need more tips on paying off debt and setting up a basic budget.
