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. 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. 🙂
{*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. 🙂

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.) 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!) 😉 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.) 🙂

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. 🙂 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!

Financial Prep: How To Start A Budget

Bragging moment: I’ve always been decently good with handling finances. Numbers and self-imposed limits have always come rather easy to me. So living within my means was never a big issue in my life and I never really felt the need to carefully watch my spending. Of course, that seemed to be more at a time when my needs and wants fit well within my income. Now, with two kids and more expenses and a decreased income, the boxing gloves have had to come off and I’ve had to sit down and actually figure out how to live on a “budget”.

Probably the biggest thing that helped to prepare me for this was the fact that I’d recently read Dave Ramsey’s ‘The Total Money Makeover’ (which I highly recommend to everyone– budget or no budget). Having a better sense of how to handle money and a desire to make sure debt stayed out of the picture, I was able to look at budgeting with a positive attitude instead of a negative one. Attitude is a big key to the success or failure of your budgeting plan. So first off, do whatever it takes to get a positive outlook on your situation. Don’t resent where you are, just acknowledge your situation and be determined to master it.

Then it’s time to start looking at the numbers. I’ve found it easiest for me to work with my budget on a month to month basis, but this may vary for others depending on how often you are paid (biweekly, bimonthly, monthly, etc.) and other circumstances. You may find that doing a budget for every week is better for you, or for longer periods of time. I will write this process in a monthly format, but it can easily be adjusted to your situation.

Step 1: So first, I started by creating a list of my mandatory expenses. ALL of them. For the whole year. This included monthly expenses such as mortgage, household bills (electricity, water, gas, etc), health insurance, as well as annual or bi-annual expenses such as property taxes, auto insurance, home insurance, auto registrations, etc. If it’s a regular bill and something I have to pay throughout the year, it’s included. These are the fixed expenses. There are also variable expenses (such as groceries, gas, entertainment, gifts, etc) that we’ll talk about in a bit, but let’s leave those aside for now.

Once the list is made, put it all in a monthly format (or whatever frequency you are using). So for my bills that are already paid on a monthly basis, I just left those alone. But for my annual/bi-annual bills, I divided those by 12 (or 6 for bi-annual) to figure out how much that bill worked out to for each month (as though I were going to pay part of it each month instead of once or twice a year).

Step 2: Now we figure our total monthly income. This is easy if you have a set income that comes in every pay period. However, many jobs (including Hubby’s) vary a bit each month. This threw me off at first because I set up our budget under the assumption that every paycheck would be the same. However when I learned that we were paid bi-monthly instead of bi-weekly, our numbers got all thrown off. So I had to start again. Just one of the joys of budgeting. 🙂 So anyway, figure out how much money you have coming in each month. There may be multiple sources of income, small amounts here and there,  just be sure to account for it all. (Side note: Something I have started doing is using the income total from the previous month to be the amount of money I have to work with for the upcoming month. This is so that I know exactly how much money I am dealing with instead of trying to guess the exact amount that will come in.)

And now we do the math.

Step 3: Add up your total expenses for the month and your total income. If your expenses are less than your income, then you’re doing good so far. If your expenses are already higher than your income, then something is going to have to change. Fast. Because we haven’t even bought groceries yet! So hopefully you’re still good at this point. I will continue on in the assumption that you are.

The amount of income that remains leftover after paying the fixed expenses is what will be used to fund our variable expenses. And since we are not going into debt for any expenses, when the money is gone, the money is gone. So we have to use this money wisely!

Step 4: So according to your family’s needs, divide the remaining income into the expenses you still have for the month. For us this includes: groceries, gas, diapers, household supplies (cleaning supplies, laundry, etc.), clothing, gifts, etc. Dave Ramsey recommends having a certain amount allocated to each category. I tried this initially and felt like it was micromanaging my money a bit too much and I was getting annoyed/frustrated with it and starting to give up on my good budgeting habits. So what I’ve recently started doing instead is dividing the money into only two categories: gas and household. Hubby and I each get a certain amount for gas for our cars, and then the rest just goes to the family’s needs–whatever they may be that month. This works for us because we’re pretty thrifty anyway, but if you find that your budget is still hard to control that way, you may want to break yours down into smaller categories. And then remember: when the money is gone, it’s gone! You simply learn to say, “we can’t afford it” or “we don’t have the money for that right now”. Discipline is the only way you will be able to stick to your budget and stay out of debt!

Okay, so I know this is already super long, but let me give an example scenario in case that was just a bunch of confusing mumbo jumbo to anyone:

So, Johnny wants to get on a budget. First he lists all his fixed expenses. He has a $600 mortgage (clearly he lives in Texas!) :), his electric bill varies through the year but he calculates that on average it is $200/month, the gas bill (for the home) averages $50/month, health insurance is $400/month, tv/phone/internet is $150/month, he doesn’t have a car payment because he got out of debt on that, and yearly he pays $2800 in property taxes, $3000 in home and car insurance, and $200 in vehicle registrations.

He needs to figure out how much each month his yearly bills (taxes, insurance, auto registrations) work out to be, so he adds those together (to get $6000) and then divides that by the 12 months of the year. This works out to be $500/month.

Now Johnny adds up his income. He uses last month’s income to pay for this month’s expenses. So he calculates that last month he made $3000.

Now doing the math, Johnny takes the $3000 income from last month and subtracts this months fixed expenses (starting with tithing, of course!). S0 we have $3000 minus $300 (tithing), $600 mortgage, $200, $50, $400, and $150 (a total of $1700). This leaves $1300. Now he also subtracts the $500/month that he needs for his yearly bills and puts that away into a savings account that is set aside specifically for that purpose. (And then on any given month when Johnny has to pay for one of those yearly bills, he simply pulls the needed amount out of that savings account to pay for it.) This leaves $800 for the month. This is what is left over for his monthly variable expenses. So he divides that $800 and gives himself $250 for gas for his car, $350 for groceries and household supplies, $50 for clothes and entertainment, $50 for extra expenses (such as oil changes on the car, gifts, etc.),  and the rest ($100) gets put into either a savings account,  or mutual fund for retirement. {Of course, if Johnny had any debt he was still working on paying off, he would tighten his expenses–maybe get rid of the tv bill, cut down on grocery bills, and cut the clothing/entertainment by 90%– and pay all the leftover to snowballing his debts.}

Tada! A successful budget. Clearly Johnny’s expenses are not quite a ‘real life’ list of expenses. There are always so many more. But you get the idea. And then you start again next month with a new income number and new expenses and a new determination to keep your budget in check and live within your means! 🙂

Yes, it’s an ongoing process and certainly not always the easiest thing to do, but I promise that it gets easier the more you learn where your pitfalls are and correct them and the more you stick to it.

Good luck and best wishes!

P.S. Here are some other good articles you can read on the topic if you’d like:

• How To Create A Budget
• How To Create A Frugal Budget
• How To Get Started On A Household Budget
• Budgeting