Financial Prep: Budgeting With Cash Envelopes

After last weeks’ post on starting a budget, I got a comment from a reader who was frustrated that her ‘once good budgeting habits’ had started to slide and she didn’t really know how to get back on track. Her main complaint was essentially that although she does a good job of starting the month on a budget and estimating her expenses, she has not been able to stay on top of tracking where all the money goes-making it hard to determine if she’s overspending in certain categories, etc. She used to be able to enter all her receipts into a spreadsheet and track all expenditures in all budget categories, but now she’s gotten behind and catching up seems impossible.ย The advice I gave her was that ‘you’ve gotta do what works for you’. If life gets so busy that there isn’t time to keep up with a detailed system anymore, then change the system. It may not be elaborate or ideal, but if it keeps your spending in line then it works. And bottom line, that’s the purpose of a budget.

The system I have found that has been working for me (with a small amount of tweaking) is the Cash Envelope System. It’s not detailed*, it doesn’t track everything I spend my money on, but it does let me know how much I’ve spent and how much I have left to spend in my various budgeted categories AND it’s easy. Those were the two most important factors for me: keep me on budget and keep it simple. I don’t have time for ‘complicated’ right now. ๐Ÿ™‚
{*Note: There are many different techniques you can use with the Cash Envelope System. You can make this as detailed or non-detailed as you would like. I prefer non-detailed because that’s what I can handle right now, but you can also get detailed down to the last penny spent by tracking all your purchases on a budget form, or in a software program or whatever you like. The point is that with using cash, you can only spend what’s there, so it prevents you from overspending.}

Now, in order for the cash envelope system to work, you actually have to have a budget in place. (If you still need help doing this, see last week’s post on ‘How to Start a Budget‘.) You have to know your total income, your fixed expenses (aka bills), and how much you have leftover to spend on other expenses. Once you’ve got that figured out, that’s when the fun begins. ๐Ÿ™‚

So here’s the basic principle of the Cash Envelope System: 1) you make an envelope for every category in your budget; 2) you withdraw the amount of cash needed for each category from your checking account at the beginning of the month (after you’ve worked your budget for the month); 3) you place the appropriate amount of cash in each category’s envelope; 4) and then that is the money you use for the month. You get rid of your debit and credit cards (or at least hide them away somewhere) and work on strictly a cash basis. And that’s it!

Now, if you were to be totally true to the Cash Envelope System (Dave Ramsey style), you would cut up your credit cards and pay even all your fixed expenses each month with cash, check, or at the most a debit card. But as I’ve mentioned before, I go a little rogue on the Ramsey philosophy when it comes to the credit card. I have definitely trimmed back my use of it, but I haven’t cut it out of the picture all together. I still use my credit card to pay as many of my fixed expenses as I can, and then I simply pay the credit card off each month. (And of course, the money that goes onto the card was budgeted for at the beginning of the month!) The reason I personally choose to do this is because I have a great rewards program on my card and so I save up those rewards points and then use them to buy gifts at birthday time and Christmas time. That way I don’t feel so much of a pinch on the pursestrings around the holidays. (Yup, I can earn enough to do that just from paying my bills with the credit card.)ย I have, however, tried to steer clear of using my card for anything else though. Hm… with the exception of medical bills… I pay those on it too. (You bet I want the rewards for a $3000 payment!) ๐Ÿ˜‰ My basic philosophy is, if I have to pay it, I at least want to get some rewards for it. But I will admit I’ve realized that by switching to strictly cash for grocery shopping, household shopping, and even gas, I have cut back on my spending. I wouldn’t have thought it, but it’s true. But I’m getting off track here. Back to the envelopes…

Switching to a cash envelope system should be pretty easy if you’ve already got budget categories in place. As I mentioned last week, outside of my fixed bills I only have two categories now and only two envelopes to go with them: gas and household. This is because I started off with several categories, and I had envelopes for each week of the month, but it was getting pretty complicated trying to keep straight what envelope different purchases were supposed to come from. Especially if you shop at a place like Walmart where you can do some grocery shopping combined with household shopping combined with entertainment (if you buy a DVD or something) all in the same store. Which envelope do I take the money out of to pay for that? And then does that mean I have to sit at home and review my receipt to take money out of other envelopes to ‘pay back’ the envelope I used at the store? See? We’re getting complicated again. I don’t do complicated right now. But if you are better than me at following your money, then by all means, it can definitely be more effective to have multiple categories in order to keep track of your money and make sure you’re not spending recklessly.

Oh, and one thing to consider… it may not be the best idea to carry around HUGE amounts of cash at all times. So if you have a lot of money in your envelopes, you may want to keep them at home and then only take out how much you anticipate needing on any given trip. This also helps protect against overspending when you see an impulse buy and are tempted to give in. (Been there. Was just there last night. Gave in because I had the cash on hand. Ugh.) ๐Ÿ™‚

Anyway, if I happen to have any money left over at the end of the month, I keep a jar that I can put the cash into that goes toward something I want to save up for… like a new crafting toy, new clothes, or whatever strikes my fancy. ๐Ÿ™‚ Or I can put it back into my checking or savings account to be there for any unexpected expenses that may pop up.

As you can see, it’s a pretty simple system. I didn’t think I would really like it when I started it, but I’ve really come to appreciate the simplicity of it. I feel like I’ve gone back to something wholesome and true when I pay with cash versus a card that represents invisible money. I like it. And I definitely like the effect it has been having on my spending habits. Try it. I bet you’ll like it too!


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