How We Budget Using Cash Envelopes

One of the first things I did to work on my over spending was switching to a cash only budget. My husband and I were getting too used to swiping our cards leading to over-draft charges because we were not paying attention to our balances. It was frustrating and disheartening and led to a ton of money lost. Rather than continuing to pay the bank any more of our hard earned money, we switched to paying ourselves by using the cash budget system.

So, What is a Cash Envelope Budget?

In case you’re not quite sure what I’m talking about – I will explain exactly what a cash budget is. The cash envelope system is where you pay for your major bills online, but any variable spending will be done using cash. It’s a system that has been around for decades. I remember my grandmother used to use the envelope system keeping her envelopes in her sewing kit basket in her closet. I never understood why she had envelopes with cash in her closet, until I asked her about it one day and it made perfect sense.

There are two main reasons why this method works so well. Psychologically you can see the money going out. This helps because cash is harder to spend because of the emotional connection we have to it so we pay cash for almost everything we buy. Using cash makes it harder to part with our money – making us think about every purchase and we see where our money is going. An added bonus is not having to worry when we swipe our debit card hoping that we have enough in the account to cover the purchase. We know exactly how much money we have to work with.

How to Start a Cash Envelope Budget

Before we get to using cash envelope system there is a bit of groundwork you have to do beforehand. The first thing you need to do is create a budget. We use a zero-based budget which essentially means that we “spend” every dollar we earn so that at the end of the month, our income will be “zero”. It doesn’t mean that we’re actually spending all of our money. It just means that every dollar has a place – a place that we’ve accounted for in our budget (like food, savings, upcoming expenses etc.).

Tracking Expenses/Spending

Before you do anything I recommend starting to track your spending. This goes back to putting in a bit of groundwork first. It sounds tedious, but it does get easier and it will become like second nature to you. Tracking your spending will help you see how much money you are spending for the different categories that you will use your envelopes for. This gives you a realistic picture of your needs rather than just guessing.

The expenses that you are going to be tracking are your variable expenses. These are expenses that change from month to month and are influenced by what is going on in your life. This can range from clothing, household expenses or gas money.

Make a Budget

After tracking your expenses for 1-2 months, you will want to sit down and work up a budget. Budgeting my money has helped me pay off debt, save for my goals, and so much more – all without feeling deprived. It doesn’t need to be perfect, you just need to do your best and you’ll see that taking action helps you move closer to your goals.

For writing out my budget I write down my income, my husband’s income and all of my bills and expenses for the month. I use an Erin Condren Deluxe Monthly Planner to organize my bills and budget. You can check out a glimpse of how I budget in the picture to the left.

Cash Envelope Breakdown

After taking a look at your expenses, you will need to break down your list into categories of what you are spending your money on. This is going to be how you are going to split up your cash envelopes. Some of my categories are groceries, school, car maintenance, household and pets. I also include things we save for like Christmas, Birthdays and vacations. Other examples of cash envelope categories could be: Health, Beauty, Gas, Personal Spending, Clothing, Sports, and  Entertainment. You can check out my post on over 40 different cash envelope categories, here.

What you are spending your money on is personal to you, so the categories you create for your envelopes will be personal to you. Whatever makes sense to you and works best for you – do that.

After creating your list, the next thing that you need to do is determine how much money goes on each category- this is where tracking your expenses will help you out. Every month we sit down and do our budget. Some of our income is variable, but we plan for an expected amount, typically low-balling our income to ensure there is enough money. We always leave a buffer in our budget for nay unexpected expenses or things that we forgot to account for, which helps A LOT. It doesn’t need to be a large amount – we usually have about $50 in buffer money. Once you’ve figured out your monthly budget and decided on your cash categories, it’s time to put your envelope system together.

Make Your Cash Envelopes

The next part is the most fun – making your cash envelopes. Of course you can use many regular envelope to start, but if you’re feeling crafty, with a few sheets of craft paper and a laminator you can make your own cute cash envelopes. I bought my laminator on Amazon – you can find it here. The paper I buy at Michael’s or any craft store. If you are not the crafty type but want cute envelopes, check out Etsy – there are many shops that sell cash envelopes in many different designs.

Funding Your Envelopes

To fund your envelopes you will need to determine how much cash you need to fund your envelopes. In our case we get paid biweekly, so we make trips to the bank every other week. Every category that you can pay for gets its own envelope. I keep a tally sheet so that I know how much of what cash to get (Gas gets $30 – so 1 $10 bill and 1 $20 bill). I take this to the bank and pull out the money I need. Once you have gone to the bank and pulled out your cash, you can fund your envelopes.

This is what an example of my breakdown looks like:

• Gas ($30)
• Groceries ($125)
• School ($25)

Every time you fund your envelope or use money in the envelope, you’ll record it. I have a tracker that I keep inside my envelope to record this information. Some people use the side of the envelope to record it. Doing this helps you know exactly how much money you have in your envelope at any given time.

Spending Your Cash

When you go shopping or need to pay for something, you can take the envelope with you. If you find yourself making an online purchase for something you’ve budgeted cash for (like to purchase clothing), you can deposit the money you are going to use in your account and record the amount in your tracker on your envelope.

When you have spent all of the cash you have designated for one envelope, this means you can’t spend anymore until the next budget period. This is where discipline and perseverance is needed. Don’t be tempted to use your card or withdraw more money or borrow cash from the other envelopes. Stick to that budgeted cash in that envelope. This might be hard to do at first, but eventually you will get used to this system and learn to stay within your budget.

So that about sums up my take on the cash envelope system and how I use it. Have you tried the cash envelope system? What do you think about it? Leave a comment below telling me your experiences & how you budget!

Xo

Morgan