The cash envelope system is a budgeting method that works. If you say it will not work for you, it means you did not try doing it the right way.
Whether you are getting out of debt or not, you can probably use some help in making sure you control your spending.
Contrary to what many people say, the best way to do this is to use cash. If you are trying to get out of debt, this is the next step you need to follow! This is why it is so important to use the cash envelope system.
If you are just learning about budgeting, you will want to check out our page — How to Budget. There, you will learn everything you want to know about budgets and budgeting.
THE CASH ENVELOPE SYSTEM
WHY A CASH BUDGET?
Cash is King!! I say this all of the time because I truly believe in this. When I bring up using cash, the first rebuttal I get is “If I have cash, I spend it far too easily.” I do not agree with this statement at all. The main reason that people fail on a cash budget is lack of tracking what they spend and assigning it a task.
When you have only $200 for groceries and you also know that your cash must last for 2 weeks. It forces you to think twice before you buy that extra item. Using coupons you can usually spend less. However, cash still helps you spend less money.
CASH ENVELOPE SYSTEM CATEGORIES
Getting started using the cash envelope system is pretty simple. To begin, look at your budget. The following are cash envelope categories you should consider using:
- Groceries
- Clothing
- Dining Out
- Hair Cuts/ Beauty
- Doctor Visits
- Random Spending (which is your spend as you want – only if you can afford it)
- Medicine
- Doctor/Dentist Visits
You will notice that I didn’t include gasoline in my list. The reason I didn’t is that most people won’t overspend at the pump. Most of us just fill up our tanks and go about our merry way. You also don’t drive around and burn fuel or decide to fuel up because your neighbor did. This is a budgeted item, but not one where you might spend above your budget. Not only that, it is usually much more convenient to pay at the pump.
CASH ENVELOPE SYSTEMS TEMPLATE
When it comes to an envelope system, you can purchase an envelope system as sold by Dave Ramsey or you can just use the envelopes in your desk drawer. I’ve even got a cash envelope template you can use as well (this template was free for a limited time, but now is available HERE for $2.99).
HOW MUCH CASH DO I NEED?
One you have your categories, you have to determine how much cash you need for each category. You will figure the amount based upon your pay period.
For example, if you are paid every two weeks, take the total monthly grocery budgeted amount and divide it by 2. This tells you how much money you will need for each of the two pay periods for that month. If you want some help doing this, you can scroll down on our Budget Worksheet Excel form and there is a little template you can use!!!
Next, review, each category you will use cash for and figure up the amount you will need. Once you have done that, you will also want to figure out how many of each denomination of bill you will need. List the total amount, by denomination, on a piece of paper. Take that, along with a check from your account for the amount, to the bank. You will make a withdrawal and then split up the cash into each envelope.
Let me simplify this for you by giving you an example:
MONTHLY BUDGET
Groceries – $500
Clothing – $100
Random Spending – $80
Doctor – $50
Dining Out – $100
MONTHLY BUDGET DIVIDED FOR BI-WEEKLY PAY
Groceries – $250
Clothing – $50
Random Spending – $40
Doctor – $25
Dining Out – $50
Total cash needed: $415 per pay period
Now that you see what you have budgeted to spend on each category each pay period, you need to determine how many bills of each denomination you will need to get from the bank. Using the same example above, here is how you will do that:
Groceries – $250 —- 3 $50 bills, 5 $20 bills
Clothing – $50 — 2 $20 bills, 1 $10 bill
Random spending – $40 —- 2 $20 bills
Doctor – $25 —- 1 $20 bill, 1 $5 bill
Dining Out – $50 —- 2 $20 bills, 1 $10 bill
Finally, write down the total of each denomination you need onto a piece of paper and give it to the teller, along with your check, so that he/she knows who to break down the cash back:
3 $50 bills
12 $20 bills
2 $10 bills
1 $5 bill
FILL YOUR ENVELOPES
When you get home with your cash, sit down with your envelopes and put the amount of the deposit into each one. Then, write down the amount of your deposit on the envelope. Now, you are ready to shop using your cash envelope system (grab your cash envelope template below).
TRACKING YOUR SPENDING
In order to truly make this system work, you will need to write down every. single. transaction. I am not joking. Doing this can help you stay on track and you also have to account for everything you spend.
When you spend $20.17 at the grocery store, make sure to deduct that from your total. You can jot it down on the outside of the envelope, or keep a paper inside with the cash for you to use to track it. If you use the envelope template above, there is space provided for you to do this. Make sure you also always update your running balance after shopping. This way you are able to see how much money you have left to spend.
If you prefer to do this method electronically, you can use You Need a Budget. Instead of individual envelopes, you actually set up electronic ones instead. Then, as you shop, you make a note in that envelope and have a new total to spend for that category.
WHY THE CASH ENVELOPE SYSTEM WORKS
The reason why the cash envelope system works is pretty simple. Accountability.
When you have to make yourself accountable for your spending, you are taking control. It also will help you spend less. If you only have $100 to spend on dining out over the next two weeks, you really think twice about ordering take out 3 days in a row. When the money is gone – you are done spending!!!
It isn’t completely about cash. It is learning self control. That is the one thing everyone will learn in going through this process. Cash enforces this way of thinking. You will quickly learn to love using cash and you will feel more in control of your finances.
Cash also has more emotion attached to it. You don’t think about the consequences of a purchase when you swipe a card. However, handing over that cold, hard cash sometimes hurts. You do really think about each purchase a bit more.
We’ve been doing this for so long that I don’t know how to shop without my envelopes! It is routine and it helps us always know, in a matter of minutes, how much money we have available for the things we need.
Original article and pictures take www.pennypinchinmom.com site
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