If you have researched how to budget, then you probably have heard of the cash envelope method. This method is not new and has been around for a very long time.
Even though it’s been around awhile, many people still don’t know how it works or the benefits. How do bills get paid on the envelope system? Can you still do the envelope system if you do everything online? What happens when the cash runs out? How do you do it when you have a spouse and he needs cash also?
These are just some of the questions I have received from readers, so I finally decided it was time to write the Ultimate Guide to the Cash Envelope System.
How It All Works
The great thing about the envelope system is that you can literally start today. You don’t need to save up cash to start or go out and buy fancy envelopes. In fact, I used my son’s construction paper to make my envelopes and everything was color coded.
Things work like this:
Let’s assume you get paid 2 times a month for a total take home income of $1,000. You budget $500/month for your groceries. When you get paid with your first paycheck of the month, you go to the bank and withdrawal $250, and put that cash in an envelope and label it “groceries”.
The ONLY thing that you can spend that cash on is grocery items. This is where you need to have discipline. If you go to the store after work and realize that you don’t have your envelope, go to your house and get it. If you spend $251 in one grocery trip, you have to put something back because you don’t have that much cash in your envelope.If you want to seriously tackle your budget you have to believe you can do it!Click To Tweet There is no cheating by using your debit card or telling yourself you will do better next month. This is it. This is your chance to really get a handle on your money.
You repeat this process for your second paycheck of the month. That will total $500/month for your grocery budget.
Repeat this process for all major categories in your budget such as gas, dining out, clothing, beauty, misc…
What happens if your spouse goes to the grocery store once in a while also?
This was a problem that I ran into when I first started. My husband would go to the grocery store after work to get groceries for dinner and I had the cash envelope. If you run into this problem as well, you need to figure out how much cash to give to your husband.
Maybe you go to the grocery store most of the time, but there is a chance that your husband might go too. If that is the case, out of the $250/mo that you have in cash from your first paycheck, take out $50 and make envelopes for your husband. You will have $200/mo for groceries in your cash envelope and your husband will have $50/mo. This might take a couple of months to get exactly right, but in the end, it worked for us.
How to Create the Cash Envelope System: Step by Step Instructions
At first, there are some things you need to decide. Do you want to fill your envelopes with cash every week or every payday? Do you have your list of expenses?
For this example, I will give you step by step instructions on how we used the cash envelope method. If you have read my blog, you know I budget according to our paychecks. Using the cash envelope method was no exception.
For us, I budget for getting paid twice a month. If you get paid weekly, then you need to list your expenses for every single week. Make sense?
- Related: Budgeting: Income VS Expenses
What about bills?
Most likely, you have things that are due the same day every month for the same amount. These are things like your cell phone, mortgage, and car payment. These bills are called fixed expenses. I leave money in my checking account for my bills since all of them are on auto-pay. You will need pull cash out for everything else. This is just the way we decided to do it because it made things a little easier for us. Doing it this way, we were not running back to the bank to put cash in our checking account to pay for every fixed expense.
Here is what our budget looks like:
When listing my expenses for each paycheck I ALWAYS make sure to check it against my calendar. I want to make sure all irregular plans, such as dinner with a friend is included in my paycheck expense list.
For example, if I know I am meeting a girlfriend for dinner, I would make sure to have more money allocated in our “Eating Out” budget than to our grocery or misc. categories.
Once I have my expenses figured out, I go to the bank and pull out the amount of cash that is needed to cover the expenses for that paycheck. I then organize the cash into our different category envelopes.
The Envelopes That I Use
When I first started the cash envelope system, I used plain white envelopes from the dollar store. I then wrote the labels for each category on them. As time went on, I found out that it made it easier if the envelopes were color coded. It’s much easier and faster to the pull out the envelope from my purse if I knew the color (category) I wanted to use.
For example, if I went to the grocery store, I didn’t need to pull out all the envelopes to find the grocery budget. I knew that it was green and this ended up saving time. It also saved me from looking like a budgeting geek when I stepped up to the cashier in the checkout line.
Don’t make it complicated and use whatever works for you. If you can only afford dollar store envelopes, so be it. If you are looking to color code your envelopes, you don’t have to go out and by designer paper.
If you have a small child in the house like I do, most likely you have construction paper lying around. I loved using colored paper because I didn’t have to use a lot of ink from my printer (small win)
Envelope Template Instructions:
- Load your printer with the paper you want to use (I highly recommend using colored paper)
- Cut along the solid lines
- Fold along dotted lines
- Tape or glue your envelope together
How to Make Sure You Succeed
I am not going to lie. There is no one in the world who can make you stick to a budget. It doesn’t matter what budget you use, actually sticking to it is always an issue.
I can give you step by step instructions, tips, and all the advice in the world, but ultimately it comes down to you. It’s so important to realize that budgeting takes work. Creating your budget is the first step, but it’s not the hardest part of budgeting.
You really have to want it. It’s almost like you have to hit a point in your life where you are completely fed up with your financial situation. I literally woke up one morning and was like, “I hate my finances! I can’t live like this anymore.” It eventually gets easier and becomes a normal part of your life, but the beginning and just starting out can be rough.
Here is some advice. You will realize very quickly what your weaknesses are. Pinpoint them and tackle them immediately. If you find yourself struggling to stick to an all cash budget because you keep your debit card in your purse, leave it at home. If you are struggling because you end up taking cash from other envelopes to make up for overspending in another category, leave the envelopes you don’t need at home.
- Related: How to Create a Plan to Pay Off Debt
What If I Spend All of the Cash?
As I mentioned above, the best thing to practice is discipline. I can’t tell you what to spend for each category because everyone’s circumstance is different. What I can tell you is that the best thing you can do for your finances is to realize you started on this journey for a reason. Keep that reason in your mind and remind yourself you are doing this because you NEEDED to change your spending habits.
Always keep a misc. spending category in your envelope system. This will give you some room to make up for some life mishaps, such as an unexpected event, or a forgotten birthday present. Use the cash that you need to cover these expenses from your misc. envelope. In the beginning, this saved me more times than I can count.
You will always have a limited amount of money but if have self-control, you can really make the money you do have work for you.
A Question from One of My Readers:
Danielle asked: I have wondered how difficult cash envelopes would be for our family since we have direct deposit income and our bank is not in town.
I Do Everything Online. Can I Still Use This System?
The answer to this question is yes. The main benefit to the cash envelope system is controlling how much you spend by having limited physical cash. You can still use this system, just in a different way. Instead of pulling out cash from your bank account, keep the money there and list your expenses the exact same way. Keep track of your spending on the envelope and make sure you don’t spend more than what you allocated.
List the amount of your category budget at the top of the envelope and track your expenses as you spend them. Look at this like balancing a checkbook. Remember doing that?
Use your debit card until you hit you budget for that category and that’s pretty much it. Keep in mind, without having physical cash as a quick visual for the amount you can spend, you have to be a little more disciplined using the cashless envelope method. It’s still a great way to budget and keeping track of your spending, you just have to have a little more willpower.
This method is ideal if you are just starting out. It’s also the best method in my opinion if you have low-income. It allows you to see how much you have left to spend quickly and does a wonderful job of keeping you accountable. When I used this system, I can’t even count how many times I went to the grocery store and wanted to buy soda (it’s totally my weakness & it’s horrible). I took one look at my envelope and thought to myself, “I can buy soda with the last of my $25 in my envelope, or use it to buy something more important things like milk, eggs or this week’s meal plans.”
Do you use the cash envelope system? What do you love about it?