The cash envelope budgeting system was made popular by Dave Ramsey. In this system, you are budgeting with envelopes by having one for each category you spend cash in.
What is the Cash Envelope Budgeting System
Cash envelopes are a money managing system. You are transforming the hypothetical numbers in your zero-based budget into real, tangible cash.
You divide the cash between all the categories you want to use cash for and place it in envelopes. Each envelope is clearly marked with the category. They may have some kind of transaction log in or on them as well.
Whenever you need to spend cash you get out the right envelope and hand over the money. Save the receipt or make a note of the transaction on your log and that’s it.
The envelope budgeting system isn’t complicated but there is more to consider so let’s dig into it.
Why Budgeting with Cash Envelopes Works
The reason this budgeting method works so well is that you feel the burn of spending money, so to speak.
Most of us get into the cash envelope system because we need to get our spending under control. If that’s you, there’s a good reason to begin.
Dave Ramsay claims we spend up to 83% more when swiping a card than handing over dollar bills.
hat’s because we actually see and feel the money leaving our hands.
It’s much easier to buy a $5 fancy coffee when you’re swiping a card than to hand over the last $5 bill in your envelope. Especially since you know exactly how many days remain till you get paid again.
That’s the burn. That’s the benefit of cash. That’s what will make you think twice about spending your dollars and thus keep your budget in check.
How to Create a Cash Envelope System – Step by Step Instructions
1 – You Need a Budget
Before you even think about creating a cash envelop system you need to have a zero-based budget in place.
The envelop system can’t stand on its own. It’s an add-on to the budget you have made on paper, on purpose before the pay period begins.
Click here to learn how to make your first budget.
2 – Decide on Your Categories
Which categories you need depends on your financial situation and where you live.
In some countries, it’s easier to operate with a cash budgeting system than in others. If you live in the States you should be able to use cash for all categories that aren’t on auto-pay.
If you are working on becoming debt-free, you will generally want to have more cash categories.
If you are in a good place financially, but still have room for improvement (and don’t we all?) you can be pickier and have fewer envelopes.
With your budget in front of you, mark every category in which you could spend cash. Your categories and the way you split them up will depend on your lifestyle and personality.
How Many Envelopes Should you Have?
Some prefer having a separate envelope for EVERYTHING. Others are good with one for each broader category of expenses. You probably know what you would prefer and remember you can always make changes as needed.
There is no right or wrong number of envelopes to have. You will have to play with it to see what works for you.
Most of us have one or two categories we struggle with the most. Those are the categories you may need to subdivide, even if you prefer having fewer envelopes.
If eating out always puts you over budget, then divide it into more envelopes. Make a take-away, a restaurant and a coffee envelope.
allows you to better track where you are spending your money and make changes as needed. Once you find that your spending is where you want it you can combine the envelopes into one again.
Cash Envelope Category Ideas
– Groceries
– Eating out (take away, restaurants, coffee, etc.)
– Gas
– Children (diapers, clothes, school expenses, extracurriculars, babysitter, etc)
– Personal care (haircuts, beauty appointments, massages, make-up, toiletries, etc.)
– Clothing (for adults, needs not wants. Wants fit in the next category)
– Blow money/ personal spending (consider having a his and hers)
– Date night / entertainment
– Pets
– Birthdays/ holidays/ gifts
– Home maintenance
– Yard maintenance
– Medical co-pays
– Annual memberships
– Car tags, insurance and maintanance
3 – Getting the Actual Envelopes
You can spend a lot of money getting your financial house in order. Especially if you like it to look pretty. Head over to Etsy or Amazon and you can get lost in the beauty that is cash envelopes.
I understand why we want to surround ourselves with beauty. I too find a beautiful envelope more inviting and motivating.
Here’s the thing though: Beautiful envelopes are not necessary.
If you are getting out of debt you do not need to spend money on reusable cash envelopes.
Instead, use what you have on hand. If you don’t already have good, old-fashioned envelopes on hand you can make some out of paper and label them by writing right on them or on a sticker or label.
4 – Find out How Much Cash you Need to Get Started
To get started, you need enough cash to get you from one payday to the next. I’m a big fan of paycheck to paycheck budgets and they work well with the envelope system.
If you get paid once a month you’ll need enough cash for a month. If you get paid every two weeks, you need enough for two weeks.
But how do you know what enough is?
You need to have a list of the categories you want to include in the system.
Once you have this list, consult your budget and note down how much you have budgeted for each category.
Add all the categories up.
That’s exactly how much cash you need to get started with your cash envelope system.
Let’s look at an example:
Amber has chosen five categories and is budgeted the following:
Groceries: $200
Eating out: $78
Gas: $65
Blow money: $20
Gifts: $ 22
Total: $385
This means Amber needs $385 in cash to get started. She is now eagerly awaiting her next payday so she can stuff her envelopes.
5- What To Do on Payday
When your next payday rolls around, go to the ATM or the bank to get out the money you need.
Unless the amount you have budgeted in every category is divisible with the lowest denomination in the ATM, you will have to go inside the bank to get out the money.
To make it easier for you and the bank teller, you should figure out not just how much money you need but also which denominations.
In the Homemaker’s resources, you will find a worksheet to make this easy. Click here to get access to all free resources.
Here’s what Amber’s worksheet looks like
First, fill in all the amounts you need for each category and fill n the total amount, for Amber that’s $385.
Then place a mark in each denomination for every bill you need. Notice that you decide how you want to split the amount. For Groceries, Amber needs $200. She could take out two $100 bills but she wants to split that between several denominations because she knows she will need smaller bills at the farmer’s market.
In the end, total each denomination. Amber needs
Add up all the denominations and check that it matches your starting total.
Fill out the second half of the worksheet and show this half to the bank teller. They will appreciate the effort you’ve made to help them do their job.
How to organise your envelopes
A common objection to cash envelopes is that people don’t want to carry that much cash around. But you really don’t have to carry a lot on you and muggers can’t tell if you carry $10 or $1000 in your wallet.
There are some envelopes you’ll always want to bring with you when you go out. For most people, personal spending/blow money, eating out and groceries are envelopes that are always in their purse or wallet.
Depending on what kind of envelopes you are using, you can bring them loose or kept together with an elastic band. You can also organise them in a cash envelope binder or in a cash envelope wallet.
Remember, personal finance is 90% personal 10% finance.
The rest of your envelopes will be kept in your home and you will only bring one with you when you know you’ll need it. Place them in your desk drawer, your sock drawer or where ever you feel confident.
If you do end up keeping large sums in your envelopes, you may want to invest in a small safe to store them in. If you keep an eye out for deals [ link to 5 strategies], you should be able to get a safe for less than $30.
How to pay bills when you are budgeting with envelopes
It’s not feasible for most people to have a complete cash budget. Even if you could do it, it would require a lot of work.
You may, however, have some bills that you pay cash for. In that case, you put cash in your envelope and when it’s time to pay that bill you take it out and spend it.
We don’t pay any of our bills in cash. Instead, we use a bank account as our combined online envelope and sinking funds account. We’ll go into depth on this later.
If you are committed to using the cash envelopes for your bills, you can take out the cash and then redeposit it in time to pay the bill. It’s more work, but if you struggle with leaving money for bills in your bank account without spending it, it could be worth it for you.
What to do if your partner spends money
In our household we both get groceries but we only have one grocery envelope. It stays at home unless we are going out to get groceries which we usually do once a week. However, sometimes will buy some groceries on the fly with our debit cards and the whole system fails!
No, wait, that’s not what happens. We have a plan for this and you should too.
We know that we sometimes get groceries on the fly using our debit cards so we have accounted for it in our cash envelope. Every pay cycle, we reserve part of the grocery budget for debit card spending.
If you are more strict about using cash only, you can just split the money between you and your partner. It doesn’t have to be an even split. With a bit of practice, you’ll figure out how much each of you needs for the category.
If some unplanned spending occurs outside of the envelope you can take the money out of the envelope and put it back in the bank.
If you have a buffer in your bank account, you can add the cash to a “bank” envelope. Then when your next pay cycle comes around, you take the money from the “bank” envelope and subtract it from the amount you need to withdraw from the actual bank.
You would do the same if you end up spending money online for something you’ve budgeted cash for.
How to make sure you succeed with this system
Budgeting takes work and dedication. It’s no different using the cash envelope budgeting method.
In the beginning, you will, hopefully, be excited to use your new budgeting system.
If you are excited but know you need this, try to make a list of how using this system will help you and why you are doing it. What will you gain? Control? Better sleep? Less debt? More in your savings account? More time being present with your children?
It won’t take you long before you begin noticing your weaknesses. Vicky Robin calls these your tchotchkes. It might be that infamous coffee or it could be make-up. It could also be that you end up using your card instead of your cash.
My personal vice is notebooks. Yes, you read that right. I’m not to be trusted with money around cute notebooks. I have something of a writing habit, which this article is a testament to.
Once you identify your tchotchkes, whatever they are, figure out how you can avoid it. For me, it has meant staying out of certain stores entirely and avoiding sections at other stores.
What to do if you spend all the money in an envelope
The beauty of the envelope system is that once the money is gone, it’s gone.
You may be tempted to steal from another envelope but please don’t. What you can do is have an emergency budget meeting with everyone involved in your budget.
A budget isn’t static, it’s ever-evolving even during the budgeting period. During the budget meeting, you may decide to move money from one cash envelope category to another.
Make sure to identify why you need to do this. Did you underbudget the category? Did you overspend? Did something unforeseen happen? How can you better plan for the unforeseen in the future?
If you find yourself spending all the money in a specific envelope every month you may need to reevaluate your budget for this category in general.
What to do if there is cash left over at the end of your pay cycle
What you do with leftover cash depends on the purpose of your envelope and where you are in your financial journey. It’s ultimately always up to you.
There are two types of envelopes, the ones that are meant to be emptied every pay cycle and the ones that aren’t. You will obviously leave any cash in the long-term envelopes to accumulate. You can read more about this type of envelope budgeting in the next section.
For the consumable envelopes such as groceries, eating out, personal spending and gas, you have to decide for each envelope what you want to do with it. Here are a few ideas to get you started:
If you are in debt you may want to use any and all leftover cash to pay off debt with. The faster you get out of debt the better.
On the other hand, if you are in debt you may not have an eating out budget or have a very small one, but you like the treat of going out or ordering in. In this case, you could use leftover grocery money towards the eating out budget for the next pay cycle. But be aware. Don’t let yourself budget too much money for groceries in order to justify takeout.
Maybe you just let the leftover money stay in the envelope and stock up on pantry items at your next grocery trip.
Something we’ve done in the past is to add all the leftover change to a savings jar. We’ve bought our dining room table and our DSLR camera with leftover grocery money. It took years to save up that much cash but it was worth it.
How the cash envelope system overlaps with sinking funds
A cash envelope is not the same as a sinking fund, but some of your cash envelopes may be sinking funds.
A sinking fund is a longterm fund.
You fund it every month but only spend the cash occasionally.
Examples of cash envelopes categories that are also sinking funds would be:
– Christmas
– Annual Memberships
– Medical co-pays
– Insurance
How Long Should You Use the Cash Envelope System?
The short answer is: As long as it serves you.
There may be seasons in your life where you want to have more envelopes and seasons where you want fewer.
We’ve had between 0-5 physical envelopes over the past few years. When I was pregnant with my second child, I wasn’t allowed to go grocery shopping so during that time we didn’t use any envelopes. However, I find that we still spend more when we don’t use the envelopes so we are getting back to using them.
If you are new to using cash envelopes, stick with it for at least 3 months. It takes time to adjust, just like regular budgeting takes practise before you get a hang of it.
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