Want to know how to use a cash envelope system without driving yourself crazy? Not sure if it works?
Let me say straight away – the cash envelope system works. If you haven’t got the cash you can’t spend it. If someone tells you the cash envelope system didn’t work for them then I’m sorry to tell you, they didn’t do it the right way.
Many people use the cash envelope system to help them control their spending and get out of debt. You don’t need to be in debt to use a cash budget.
We used a cash budget when I was on unpaid maternity leave. When your family income more than halves the easiest thing to do is see the money.
If you can’t see it, you don’t have it.
It worked for us
Using the cash envelope system helped me to take the maximum unpaid maternity leave I was entitled to. In the UK we can have up to 12 months maternity leave which is a combination of paid and unpaid leave.
We could not have survived those extra unpaid months without sticking with a cash budget.
If you have debt, using cash is absolutely the thing you need to do. I know credit cards can provide you with cashback, points and rewards but you’re in debt and have likely racked up debt on your credit card in the past.
Do you really want to test your will power when you’re trying to become debt free if you don’t need to?
Related post: 21 tips to help you become debt free
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Why you should use a cash budget
When you are using cash for all your daily expenditure it concentrates your mind wonderfully. If you don’t have the cash you can’t spend it.
I know some people might say to you “Oh, I can’t budget with cash as I spend it too quickly”. You will fail with a cash budget if you don’t plan what your cash is going to be spent on.
If your cash budget is $1000 for the month and you don’t break it down in to each week and each category then of course you’ll spend it all, and likely within 2 weeks.
For your cash budget to work you need to decide in advance how much cash you will spend on each category (e.g. groceries, clothes) and know what you are actually spending your money on.
Knowing that your grocery budget is $100 a week makes you view every purchase differently. No point blowing $90 on the first day if you know you will need $20 to top up later in the week on milk, bread and eggs.
Your cash budget will make you think twice about those impulse buys, it’s not a bargain if it blows your budget is it?
Related post: 5 steps to get your budget back on track
Categories for your cash envelope system
When you are ready to start using the cash envelope system you can get started within a few minutes. But first you must decide on the categories you will use in your cash budget.
What you are going to spend your money on? I would suggest the following categories are an essential starting point:
- Household items
- Kids activities
- Fun money spending
You may identify other categories that you want to include in your cash budget. Try not to have too many otherwise you’ll end up with a large stack of cash envelopes!
You will obviously be spending more than just these categories as you will have bills, insurance and rent or a mortgage to pay but these don’t really work with cash.
Fun Money Allowance
You might be wondering why I’ve included a fun money allowance. When your budget is tight every penny counts.
But if you don’t allow yourself a little fun money or guilt free spending then your chances of blowing your budget are much higher. Fun money can be pennies in comparison to the rest of your cash budget.
Being able to buy yourself a guilt free chocolate bar or cheap lunch out with work colleagues once a month will help you sustain your budget much more easily than if you cut your spending to the bone.
You probably also need to budget for fuel. Previously I would have added fuel to the categories above and certainly my cash envelope system originally included fuel.
These days though you mostly pay for fuel by card at the pump and don’t have the option of paying cash. The cheapest fuel in my local area is always at card only pumps so cash isn’t an option.
This doesn’t mean you should go mad on buying fuel and driving everywhere! Always consider whether you need to make that car trip or whether you can walk it or combine it with another trip another day.
Related post: 5 frugal tips to save money on long car journeys
How much cash do you need?
The starting point for using the cash envelope system is to have a cash budget that ensures you don’t overspend. You need to allocate money to every bill you must pay and every category you need to spend money in.
Once you have your monthly budget you will know how much cash you need for each of your cash envelopes.
Depending on how often you are paid is how you must work out your budget. If you are paid every two weeks then divide your monthly budget in two for each category.
I strongly advise you to NOT withdraw a months worth of cash for each of your cash envelopes. I am speaking from experience here when I say you are much more likely to overspend in the first 2 weeks.
Work out how much cash you need for your cash budget for 2 weeks expenditure. Draw this cash from the bank such that you can put the exact amount you need in every cash envelope.
There is no point drawing your cash out in £50 denominations when some of your categories might be £120 or £90. You need to start each week/fortnight with the right amount in each envelope and repeat this 2 weeks later.
That way if you overspend in the first week, you have only done so by some of the 2nd week’s money, not the whole months’.
Related post: 21 tips to help you become debt free
I know reading the above could get a bit confusing and you might be wondering what this looks like in reality. Say you earn $2000 a month.
Your rent, utility bills, house insurance etc are all paid via automated payments so no need for them to become a cash category.
If you haven’t already set up automated payments for these bills please do!
Having worked your cash budget out you may have decided the following:
- Groceries – $300
- Household items – $50
- Kids activities – $100
- fun money spending – $50
- Entertainment – $80
Now these are your categories for your cash envelope system for the month so you need to halve them in order to work out what cash you need to withdraw for 2 weeks:
- Groceries – $150
- Household items – $25
- Kids activities – $50
- fun money spending – $25
- Entertainment – $40
Total amount of cash you need to withdraw from the bank = $290
Fill your cash envelopes
Once you have withdrawn the cash from your bank you need to split it into each of your cash envelopes. You can use any envelopes for your cash.
The envelopes need to be blank on the outside as you are going to be using this space to track how you spend your cash.
Put your cash in each envelope and write down on the outside how much you have put in it. If you have any money left over from your last 2 weeks budget then add this to your written total.
Every time you spend any money from that cash envelope you need to write down how much you have spent and subtract it from your total.
This means you need to take the cash with you when you go shopping so you can use that particular cash envelope and put any change you receive back in the envelope immediately.
E.g. you spend $68.42 at the grocery store. Use money from your grocery cash envelope, place the change you receive back in that envelope.
Write down that you have spent $68.42 and subtract this from your £150 starting balance. Now you have $81.58 in the envelope and written down.
Related post: 13 killer ways to save money on groceries
Writing down everything you spend and subtracting it from your starting amount provides you with a really clear visual of your money being spent. You can see at a glance how much money you have left in each envelope by looking at your new total.
Why cash envelopes work
Making your cash budget and spending visible means you are showing yourself how much you are spending. You can see straight away if you have spent too much in the first week of your pay period if you have only $20 left out of a $150 budget.
Using cash really helps you to control your spending. Knowing and seeing your cash dwindle concentrates your mind on what you are spending it on. And helps you control what you actually buy.
If you know you only have $150 for your groceries for 2 weeks then you are not going to spend $140 in the first week. You will be much more conscious of what you are buying, how much everything costs. Which is a good thing!
Handing over your cash
When you buy everything with a card it becomes very easy to just tap your card or swipe and not even think about the fact you have spent money. With cash you have to physically hand it over which, believe me, is so much harder!
You can see your money disappearing into the cashier’s hands. You don’t get that feeling when you pay by card.
Because the cash is yours, it’s physically present and you know how hard you worked for it, you will find it much easier to not spend so much.
You will find you want to hold onto your cash for just a little bit longer making it easier to keep within your cash budget.
We used the cash envelope system first off when I was on unpaid maternity leave and it made a huge difference to our ability to stick to our one income tight budget.
Nowadays I don’t always use the cash envelopes as I am better at controlling my spending and can gain rewards through my credit cards.
However whenever I feel my spending getting a little too free I revert to our cash envelope system for a few months to get us back on track.
And it works – every time.