So far in our Journey to Debt Freedom 2013, I've shared our total debt and our monthly budget. Today, I'm sharing about the cash envelope system (here's how I made my own) and how it works for us.
The cash envelope system isn't anything new, but it seems new in a culture flooded with swiping cards. It's a way to control and monitor spending by taking your money out of the bank, dividing it into envelopes labeled with a specific budget category. Spending is done with cash only. That's the basics. Now onto a little more of the benefits, how to get started, and how we make it work for us with our cash categories.
Before jumping on board with the cash envelope system, it's helpful to know why it's so helpful. Here are a few reasons we've found it helpful...
We feel the challenge of letting go of hard earned cash.Swiping a card doesn't evoke the same emotional attachment as handing over cash. Swiping a card: Easy. Counting and letting go of cash: Gut wrenching. While emotional attachment to cash isn't generally a good thing, it has been a helpful tool in saving money.
We know how much we spend, when we spend it.Sometimes (often), I swipe my debit card without paying much attention to the total due. Seriously, without checking the receipt, I often wouldn't even have a guess at how much I paid. When I pay with cash, I am very cognizant of how much I am spending--which is vital in sticking within a budget. (Knowing this also effects our purchase choices before even getting to the register.)
We know where we stand in our budget categories.Just a quick glance in our envelopes says how we're doing with our budget (often: not great). An excessive surplus in one envelope could mean we need less in that category, and running out too soon might mean we need a little boost in a category. Or, for us (because we've had a budget for a while and know our category amounts), running low means we need to tighten up until the end of the month, and extra cash means we just might get to add it to next month's cash and make a larger purchase.
When the money is gone, it's gone.We simply don't run in the red when we're using cash. Once the money is gone, it's gone. No handing over invisible bills and hoping it works. No overdrawn fees. We either have the cash or we don't. If we don't, then we'll have to wait until next pay day for whatever it is we want.
Getting Started with the Cash Envelope System
It only takes a few easy steps to get started with the cash envelope system. Here's how we did it...
Set the budget.I shared our budgeting basics last month. This is an important first step. We know how much we spend in categories like clothes, food, and entertainment. If you're just starting out, this might be more of an estimated guess until you can try it out and see what works.
Choose cash categories.Not everything has to be paid with cash. There are certain set bills that are much easier to pay from our bank account. We know those variable expenses that tend to cause us to overdraw--clothing, spending, eating out, entertainment, food. Those are budget categories perfect for cash categories.
Make/buy cash envelopes.I made my cash envelopes from a few of my favorite scrapbook papers. I made the template so it's closer to cash size and fits better in my wallet than full size envelopes. You could also use Dave Ramsey's cash envelope system, make or buy a fabric option (try Etsy), use a small file envelope, or try regular store bought envelopes to get started. As mentioned below, you can also think outside the envelope.
Spend and adjust.We started as soon as possible using our cash for the appropriate categories, then observed. Observing what makes it difficult to stick with while thinking up solutions. Observing what categories have cash left over or run out too soon, and adjusting our budget (or spending) accordingly.
Making the Cash Envelope System Work for You
The cash envelope system can be personalized and adjusted to fit any person or lifestyle. Here are a few tips that helped it work for us...
Note temptation to overspend.We all have our weaknesses and areas where we overspend. Mine is eating out. (It used to be the clearance shelves at Target.) Daniel's is probably hobbies. The kids' is clothes. Recognizing these areas of weakness has helped us rethink our habits, how we spend our time, how we can overcome them. A solid meal plan helps with the eating out, (learning about living with less cured my Target habit), saving-up funds hobbies, and shopping second hand with a list covers clothes.
Think outside the envelope.Not all cash has to go in an envelope, and not all cash has to go in your wallet. (In fact, it's better if it doesn't.) We only have three cash envelopes because Daniel's cash goes in his wallet (without an envelope), and my cash goes in my wallet (without an envelope).
No borrowing from another envelope.This would probably be my husband's number one rule. In the past, if we run into a tight spot and needed groceries, I was tempted to pull from whatever is left (often his spending money, because he leaves it in the bank for future purchases). Stick to the cash available for each category. If you need to get creative with beans and rice because you blew through your grocery money, then do it. Even if you have money left over in another category.
Set goals.Thinking about the bigger picture can motivate us to spend better. Sure, we have $400/mo cash for groceries and necessities and we generally use up every last penny. But setting a goal that we can all get on board with (paying off debt, saving for vacation?) can motivate us to make do with less and save those extra pennies.
Choose essential categories.The number one thing that helps us stick with cash is choosing only the categories essential for our family. For instance, some people take out gas money in cash. We personally never overspend in this category and find it really easy to manage it through our debit card, so that isn't a cash category for us. However, we could easily eat out beyond the means available in our account, so this absolutely has to be a cash category for us.
Our Cash Categories
Alright, you waited for it and finally here it is: Our family's (current) cash categories...
Household + Eating OutThis category gets $100/wk or $400/mo, which includes groceries and household essentials (cosmetics, toilet paper, etc.). It is kept in our cash envelopes in my wallet. (I hand Daniel this cash if he runs to the store for something we need; but I do much of the grocery shopping.)
If I meal plan and stick with the list, we can often spend around $75/wk and sometimes less. We cut our eating out fund to afford our gym membership (both supporting healthy living), and decided if we could keep our household spending below $100/wk, then we could use the surplus to eat out. We're still in a learning curve on that, and have been ending up spending about $450/mo total household + eating out. I've heard of others doing worse, so I'm okay with that, though we're still aiming for the $400/mo.
Parent SpendingWe each get $30/mo for our personal spending money. This covers everything not considered a need--hobbies, clothes, girls or guys night out, etc. This money is kept in our respective wallets. (We sometimes keep some or all of it in the bank if we know we'll be buying something online that month.)
This might seem a little (a lot?) low to you. Let me solve that for you: It is. We've never had much in this category, due to our church income and student loans. But this is particularly low because we are refocusing on paying down debt this year. I wanted to do something epic like not spend anything all year. But my smart husband suggested we needed something in this category or we wouldn't stick to the plan. He's right. This little bit each month has kept us from going completely insane.
Kids' SpendingThe kids get $20/mo to share for their spending money. This covers wants and some needs--toys, clothes, play dates. This money is kept in a cash envelope in my wallet.
Like the note for our spending above, this is lower this year. We often don't spend it all each month, so I let it carry over for the months we need to buy seasonal clothes or gifts. In the future, this category will likely become their commission (allowance)--a reward for their work (the work not otherwise required for simply being in our family), and a discussion-ender for when they want expensive jeans with holes in them. (Or was that just a problem between my mom and older brother in the 90s?)
Other CategoriesWith less than five categories, we have just enough cash to live comfortably (top 5% in the world!), and little enough to remember we're in debt. If we had the income for it, we'd likely also have separate categories for things like home decor and furnishings, clothes, hobbies, etc. For now, we lump them together in the above categories or don't spend on those things.
Truthfully, I hope that continues. Because who really needs an ongoing budget for home decor? Our house is set up, simple, and everything a home should be. While I dream of upgrades, is that what we really need?
And right there is the question that guides all of our budgeting and spending and cash flow...
Is that what we really need?
Do you use a cash system? How do you make it work for you?