Whether you are working your way through paying off debt, trying to save money, or just wanting to take control of your money then the cash envelope system is the way to go!
This plan works! Here’s how to do it!
My husband and I started using the cash envelope system in July 2015 which you can read more about our journey to getting out of debt here and my only regret is that I wish I had done it sooner. I no longer use credit cards, debit cards, or checks when I go shopping, it’s all cash money dollar bills for me! I don’t even own a credit card anymore, I paid them all off and closed the accounts! If you haven’t heard of what the cash envelope system is, it’s basically putting cash into categorized envelopes every month, paying for your day-to-day purchases from those envelopes and once the money runs out, it’s out! It forces you to have to wait until the next month to start spending in that category again.
Financial guru Dave Ramsey has made the envelope system a breeze, it’s simple and easy once you know what to do and give it a try. Studies have shown that there is an emotional response that occurs when you pay with cash rather than debit/credit cards and you actually spend less when you pay with cash. You will find yourself asking “do I really want to spend my cash on this” and it leads to a more intentional lifestyle when it comes to finances. The envelope system can be used by anybody, regardless of their income and financial situation or if they have thousands of dollars in debt or zero debt. I have outlined below exactly what the cash envelope system entails and how you can start making it work for you today.
The first thing you will want to do is take a look at your current spending habits.
This is the hard part, nobody wants to come face to face with the reality of their where their money goes. But trust me you need to do this! It truly is eye-opening! I always thought I had a good idea on where most of our money went but boy were we in for a surprise! We were spending WAY MORE than either of us thought on EVERY category! The best way to do this is to grab a glass of wine (or tequila), set aside a good chunk of uninterrupted time, and print out your last 3 months bank statements. If you have a spouse it’s best to do this together but if your spouse is not on board then this may be what pulls them in once they see the results. Grab some colored highlighters or markers and go through each month, highlighting the different categories of spending on each statement. For example, you could use a green highlighter for all gas transactions for the last 3 months, use a different color for all food transactions including all grocery shopping and eating out and fast food transactions. Skip over any regular occurring bills like your electric, mortgage payment, insurance, car payments etc. These types of transactions you will want to keep set up as auto pay or check or however you are currently paying, they do not warrant an envelope since they are set bills which you cannot adjust monthly.
When I went through our bank statements I used the following categories: food, gas, kids (diapers and toys for daughter), vehicle expenses (oil changes, tires, maintenance, etc), entertainment (movies, bar tabs, show tickets, etc), clothing, household items (this was for items I got at Target like dog food, cleaning supplies, etc), medical, and a miscellaneous category for things that didn’t quite fit in any other category.
Once your statements looked like a fruity pebble explosion of color grab a calculator and a sheet of paper. Write each category down at the top of the paper for each month and total how much you spend and write that number down. Do this for each month so you have 3 months of data that you will average out to get one dollar amount of your average monthly spending for that category.
When we did this it was shocking, it showed us just how insane our spending habits were! For example, from the first month of bank statements it showed that my husband was spending about $400 at convenience stores, the second month was $350, and the third month was $380 so our average monthly spending on energy drinks, snacks, and lotto tickets alone was $376!
I was absolutely flabbergasted at the amount of money we were spending on unnecessary purchases each month!!!
Hundreds of dollars each month to shoes, clothes, jewelry and stuff I didn’t need! Every time I would get my oil changed I would take it to Sears auto which was conveniently located at the mall and it would end up costing me about $300 because I’d shop until they called and said my car was ready. Like I said before I truly thought I had a good idea of where our money went but once we saw those numbers it was clear that we both had no idea. This is where the reality sets in and you say oh. my. goodness. something has got to change, and the good news is, it did for us and it can for you.
The next step is coming to terms with what you have spent in the past and modifying your future spending habits.
You will need to go through each category and figure out how you can trim it down to the lowest most realistic amount of spending for one month. So for example if you were spending $800 a month on food for the family (that may include going out to eat and groceries) then set a reasonable amount, perhaps going down to $500 a month to start. You may have to adjust later when you are just starting out, the first couple months are the hardest because you are having to adapt and modify. That means that if you go grocery shopping and you only have $100 left in your grocery envelope at the end of the month and you are checking out and it comes to $120 then you would need to put $20 of items back, once the envelope is empty there is no more spending, period. If you decide to have a “Grocery” envelope and a separate “Restaurant” envelope then you will need to figure out what those amounts are going to be. For our family we just use one “Food” envelope which includes all groceries and eating out money (we are Vegan so going out to eat where we live is a bit more challenging anyway due to lack of options so eating out is not something we do much of). If you are trying to get out go debt than I would recommend not having a “restaurant” fund so that you can focus on becoming debt free first and foremost.
Eating out is EXPENSIVE!
One of the biggest areas that we can make the most financial impact monthly on is our food budget, it’s amazing what you can save when you eat at home and plan your meals!
Make eating out a treat, not the norm, and besides eating at home is most likely much healthier. Go out to eat when you pay off a debt or for a special occasion, otherwise if you have debt eat at home until you get out of debt.
Continue working through each category and challenge yourself to really separate those wants from needs. The point is to spend less so trim trim trim. Maybe you can cut back on all clothes shopping or entertainment or if you have any expensive hobbies like golf cut back to once a month.
There is one area that is not really negotiable to trim down and that is the gas category. You still have to drive to work or school and most of your driving is probably necessary anyways so that category is usually the same unless you just take a lot of leisurely road trips, no need to trim down but you still need a monthly average so that you can fund the “Gas” envelope appropriately. Most of us are used to swiping that debit card at the pump and some people choose to continue carrying their card to purchase only gas with due to the convenience factor. If you pay with cash you will have to go inside to pay first and then pump but it has not been an issue for me, just took a little while to get used to. I actually keep my gas envelope in my car at all times so it’s within easy reach.
For all of those items you purchase that don’t really fit into another category just throw it into a “miscellaneous” envelope, this may include things like haircuts or gym memberships. I would also suggest having a “vehicle” expense fund for any future oil changes or tires and car maintenance or a “medical” fund for doctor visits and copays. That way you can tuck away a little each month so it doesn’t have such a big financial impact.
Be sure to create an envelope for “Giving” so that you can help others along your journey. This can be what you give to your church, or your favorite charitable organizations or even those unexpected gifts you need to purchase for a birthday or wedding. The more you give the more you get, and I’m not just talking financially. Giving should always be part of your budget even if it’s just a small amount, make it a priority.
Set a start date, depending on when and how often you get paid you will need to adjust accordingly.
My husband gets paid once a month but I get paid bi-weekly so we decided to “fill” our envelopes once a month at the beginning of the month. Some people choose to fill their envelopes every two weeks if they get paid bi-weekly, just do what works for you.
Now you should know at this point after going through your statements and analyzing how much you need in each envelope so add those numbers up and there’s your total cash amount that you will need to fund your envelopes.
Determine how you are going to get the cash, you may have to take a trip to the bank on the 1st of the month or you may decide to make a couple of withdrawals at the ATM but be careful for fees, the point is to find ways to save but the convenience of an ATM nearby can be handy. I started by going to the bank once a month but shortly realized that my workplace offers an employee ATM that has no extra fees so it doesn’t cost me anything to withdraw my money. The only issue is that most banks/ATM’s set limits on how much you can withdraw each day so I have to break mine up into two transactions over 2 days. I just make sure to grab my debit card from the safe at home and put it right back after I’ve done my withdrawals so I’m not tempted to spend using my debit card. If you do get your money out of the bank make sure to tell them to break down a few of the hundreds into smaller bills otherwise you may end up with a bunch of hundred-dollar bills that are hard to break up into each envelopes allotted amount.
Fill those envelopes and start spending!
At this point you should gather however many small envelopes you will need or there are many free downloadable envelope templates online that you can print out and create at home, here is a link to the envelopes I use because the size is perfect for cash. You can even use small clips or a coupon organizer instead of envelopes if you’d prefer. Label the outside of each envelope for each category and once you have the cash go ahead and fill them and start your cash journey! I like to write the amount of cash I start with inside of each envelope so the next month I already know what I need to fund it and don’t have to try to remember. Some people like to track all of their spending on the envelope itself like a checking account ledger-however I find this unnecessary in my situation. I spend what I’ve got and I know that once that envelope runs out I’m done spending in that category for that month.
Don’t carry a purse or large wallet? No problem!
There are some things you may want to look at adjusting as well to fit your needs. For example, my husband, like most guys, only carries a small wallet in his pocket so he does not have room for envelopes like I do in my purse. So at the beginning of the month he gets his “Zach” envelope for all of his day-to-day expenditures. This includes mostly his gas and food when he is on the road at games or tournaments since he is a coach. So he keeps his envelope in the safe and pulls out what he needs for the week so he’s not carrying around a lot of cash. Since I do most of the grocery shopping and household stuff I keep all the category envelopes with me. If you’re not comfortable carrying around a lot of cash especially at the beginning of the month, then just keep the envelopes at home and pull them out whenever you need them, like if you are planning on going grocery shopping just take that envelope for the day and return it when you get home.
Stick to it and see results!
I have found that by the end of the month I usually have a big chunk of money leftover from my envelopes because I was intentional with my money so it’s a double win, not only did I set a budget but I stayed under budget! I personally like to put all the leftovers back into savings account and start fresh each month. At the end of the month you may decide to take all of the leftovers (which hopefully there will be some right!) and deposit that into the bank or throw it at debt or maybe treat yourself to a night out for staying within your budget. Some people like to keep the leftover money in their envelopes so they have extra cushion for the next month. This is a great idea to do for things like your “vehicle” envelope since one month you might not have any car expenses but the next month you need to do a repair so having that money on hand makes it easier to cover, it just becomes a growing fund. Another bonus is that by paying with cash you end up with a lot of change, so collect that in a jar and viola, within a few months you’ve got a hefty little change deposit you can make into your savings account!
You are in control! The envelope system gives you permission to spend, so feel good about what you are doing!
I will forever use the cash envelope system because the benefits of the envelope system have proven to be one of the best financial decisions I have ever made. We initially did it to get out of debt but it has been such a positive lifestyle change that has helped us tremendously there’s no reason to stop. Cash is where it’s at. It forces you to stay within your budget. It not only changes your spending habits, it changes your relationship with money in a positive way. Getting your finances in order enables you to do so much in life without the added stress and burden that most people go through living paycheck to paycheck.
In addition to using the cash envelopes be sure to get a written monthly budget underway so that you can really take control of your finances. Track all of your expenses and subtract it from your income, assign every dollar a category and be intentional with your money. Set goals and watch your debt disappear and your savings go up. Good luck!