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The cash envelope system can help you stick to your budget and stay out of debt by making it difficult to overspend. When your envelope’s empty, you can’t spend any more.
It’s a simple and effective method of controlling your spending.
In this post, I’ll show you how you can start using cash envelopes for budgeting. It costs nothing to get started (except a buck or two for a box of envelopes), and it might just be the answer to your overspending problems.
What is a Cash Envelope System?
The envelope system is a budgeting method for cash-only spending. Cash is placed into separate categories, which are each given their own physical envelope.
With cash envelopes, you can see exactly how much money you have remaining in your budget for a specific category. If you’re still using a credit or debit card, it can be easy to go over your budget.
For example, if you know you have exactly $102.49 in your grocery budget but the cash is still in your bank account (or worse, you’re using a credit card), you might not track what you’re buying as closely as you should.
You might think, “It’s okay if I go a dollar or two over budget. I can adjust it later.”
The problem is that a dollar or two here and there can add up fast.
If you had cash, you’d be more likely to track what you were spending before you got to the register, even if just to save yourself the embarrassment of being short.
Using cash envelopes makes it harder to buy things. And it should be hard to buy things. Many people are in debt because it’s just so easy to buy more things.
But you don’t want to be like other people. That’s why you’re here.
Let’s take a closer look at how this system works, so you can use it to be a weirdo and stick to your budget.
Cash Envelope Categories
You probably pay many of your bills online, such as your rent and utilities, but you can still use cash envelopes for other expenses. Here are some commonly used cash envelope categories:
- Household Goods
- Pet Expenses
- Holidays & Gifts
These are the categories where you can easily overspend, except maybe gas. (No one really buys more gas than they need, do they?)
When you create your budget, think about how much you really need in each of these categories. For your first month, you might want to budget a little more than you think you need just in case. It might take a few months to refine your budget (and that’s okay).
How to Use the Cash Envelope System
The system is simple to use, but you’ll need a few supplies to get started.
What you need:
- A budget
- Cash envelopes*
- Pen or marker
*You can buy fancy pre-made envelopes, make your own DIY cash envelopes, or use the standard white stationary envelopes. I have tried the fancy ones, but I think the package of 100 #6 ¾ envelopes I bought at Walmart for $0.98 work the best.
Step 1: Create a Budget
I won’t go over making a budget here since I’ve already covered it in another post. But you’ll need to know how much you have budgeted for each category.
While you’re creating your budget (or afterward), decide which categories you want to use cash for. Use the cash envelope categories listed above as a guide.
Step 2: Create a Cash Withdrawal Schedule
Determine how often you’ll be replenishing the cash in your envelopes. Are you paid weekly or monthly? Every two weeks?
When we were using cash envelopes, I kept a budget spreadsheet with our monthly budget. We were paid bi-weekly, so I divided the budget amount for my chosen cash categories in two. We took out half the amount every two weeks and put the cash in our envelopes.
You can withdraw your cash directly from the ATM or write yourself a check and cash it. Our expenses were typically low enough that we could withdraw from the ATM. But be aware that most banks have daily ATM withdrawal limits – usually around $400. If you need more cash, write a check.
And if you need change, write a check or just ask to make a withdrawal at your bank’s counter.
Ask your bank teller for some five and ten-dollar bills if necessary. They like to hand you hundreds and fifties, but that’s hard to keep up with when your pet food budget is $25.
I make my cash budget using multiples of $5. Then I figure out how many fives and tens I need, and ask for them when I make my withdrawal. That way, I can easily divide up the cash immediately.
Step 3: Label Your Envelopes
Write the category name and budgeted amount on the back (or front) of each envelope. It’s as simple as that.
Some people like to track every single expenditure on a register, but I think that’s overkill. If you can open the envelope and see how much cash you have, you’ll be fine.
If you really want to track every dime you spend, you can create a simple register on the back of your envelope or buy a fancy one that comes with a pre-printed register. In my experience, this becomes tedious fast, but you might want to try it out for yourself.
To create a register, just draw five columns on the back of your envelope:
|01/02/2018||Grocery Store||$ 85.00||$115.00|
(Use a ruler to help you make straight lines.)
Fill out the fields every time you make a purchase just like a check register.
Again, this is NOT necessary. It’s optional if you like to track your cash expenditures.
Step 4: Start Using the Cash Envelope System
Withdraw your cash, divide it between your envelopes, and you’re ready to go!
Start spending the cash from your envelopes, and keep an eye on your balances to make sure you have enough money to last until the next time you get paid.
You’ll be amazed at how much more aware of your spending you become when you’re using cash.
What is your experience with the cash envelope system? Do you have any other tips and tricks you’d like to share? Leave a comment below and let us know!