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Thinking about embracing the cash envelope system but not sure how it works and if it will work for you? This post will walk you through how to set up your cash envelope system and budget and the benefits of using the cash envelope system.
Most of us at one time or another have struggled with overspending. When I was in debt, I learned about the cash envelope system and quickly realized the beauty behind this simple and straightforward approach to managing my spending.
Read more: My Debt Free Journey
Despite what many people say, the best way to control your spending is to convert to cash. I’ve heard all the excuses for why cash won’t work for you, but I’m here to tell you that embracing the concept of converting to cash is what is going to get your out of debt and help you control your spending.
This is also why it’s so important to use the cash envelope system.
Why A Cash Budget?
The saying ‘Cash is King’ is true on so many levels. Converting to cash breaks the amnesia that’s created when you use plastic in the form of debit and credit cards. Only cash gets you reconnected to money in a way that plastic can’t do.
But I know that when I bring up using cash many people tell me that if they have cash, they will spend it too quickly. Let me say that statement couldn’t be further from the truth.
The reality is when you use cash, the opposite occurs. You almost immediately become more conscientious about your spending because you don’t want to part with your money. If by chance you fail on a cash budget it’s not because of using cash it’s because you’re not tracking your spending.
Read more: Why Using Cash Only Is Crucial When Getting Out of Debt
The truth is that when you use cash, you spend more wisely.
When you go to the grocery store, and you know that you’ve allocated $200 for groceries for the next two weeks, you’re hyper-focused on what you’re putting into your cart. You know you have to make the money stretch and last because there isn’t a buffer.
Once the $200 is gone – it’s gone!
So let me show you how easy it is to get started using the cash envelope system.
HOW TO GET STARTED USING THE CASH ENVELOPE SYSTEM
Getting started using the cash envelope system is pretty simple. To begin, examine your budget and determine all the categories where you can use cash to pay for items. Typically they include the following:
- Dining Out
- Hair Cuts/ Beauty
- Doctor Visits
- Random Spending (this is your personal allowance if you can afford one)
- Doctor/Dentist Visits
Read more: Commonly Forgotten Budget Expenses You’ll Want To Include
There are many envelope systems out there. You can purchase an envelope system through Dave Ramsey’s site, or you can create your own using standard envelopes you have in your desk drawer. You can even use those small penda flex type holders and create something too.
Once you’ve determined which budget categories will use cash, you’ll have to determine how much cash you’ll need to include in each category. Looking at your budget and your pay period will determine the amount.
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 don’t have a budget established yet, download them by signing up below.
Next, review, each category you will use cash for and check your budgeted amount.
Next, you’ll determine how you want to get your cash. How many twenties, tens and so on. To do this 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.
Here’s an example:
Groceries – $400
Dining Out – $100
Gasoline – $100
Allowance – $80
Doctor – $50
MONTHLY BUDGET DIVIDED FOR BI-WEEKLY PAY
Groceries – $200
Dining Out – $50
Gasoline – $50
Allowance – $40
Doctor – $25
Total cash needed: $365 per pay period
Here’s a breakdown of how many bills per denomination you will get for each category.
Groceries – $200 — 4 $50 bills
Dining Out – $50 — 2 $20 bills, 1 $10 bill
Gasoline – $50 — 2 $20 bills, 1 $10 bill
Allowance – $40 —- 2 $20 bills
Doctor – $25 —1 $20 bill, 1 $5 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:
4 $50 bills
8 $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.
TRACKING YOUR SPENDING
To make this system work, you will need to write document EVERY SINGLE TRANSACTION. By doing this, it will help you stay on track and account for everything you spend. If you skip this step, the cash envelope system will NOT work.
If you spend $25. 35 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 making a purchase. This way you always know how much money you have left in your envelopes.
Read more: Good Money Habit #9 – Track Your Income and Spending
WHY THE CASH ENVELOPE SYSTEM WORKS
The reason the cash envelope system works is simple.
1. It requires you to get reacquainted with your money in a way that plastic can’t do.
2. It requires you to be accountable for your spending.
3. You think about your purchases in a new way and become hyper vigilant about what you spend your money on.
Using the cash envelope system helps you to gain control over your finances because you are forced to think before you spend. We have an emotional attachment to cash, and so when we have to part with it, it affects us more.
Start using the cash envelope system and start enjoying the benefits of being in control of your spending.
MY FAVORITE MONEY-SAVING TOOLS
EBATES: Want to earn cash back when you shop online? Ebates acts as a shopping portal offering coupons and cashback from over 2,000 online stores. I always check on Ebates first whenever I shop online! You can join Ebates for free and get a $10 welcome bonus when you sign up through this link.
DIGIT: Like the idea of saving but need something automatic? Digit is the perfect solution if trying to automate your savings strategy. In essence, what Digit does is use an algorithm to detect spare money and then transfers it to a secure savings account – so you’ll always have something to fall back on. Sign up for free!
GROCERY BUDGET MAKEOVER: Is your grocery budget giving you a serious kick in your families spending plan? Grocery Budget Makeover helped my family slash $6,000 a year from our food bill! Learn more about how Grocery Budget Makeover can help you save money too!