Budgeting with the cash envelope system.
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The cash envelope system of budgeting is my FAVORITE! It is so important to know what money is coming in and where every penny is going. It is the only way to keep control of your spending and truly understand what you are spending your money on. I’ve been there – credit card balances creeping up. Once the amount is at a certain point, it’s easy to say, “it’s already so out of control, what’s a few more hundred dollars?” Home equity loan – debt debt debt. UGH.
The cash envelope system is what sealed the budgeting deal for me. I have never been a good budgeter. I’m more of a “whatever, you only live once” kind of gal. And that just doesn’t work when you are truly buying things you don’t need, and never putting money away into savings (and spending more than you are bringing in!) I should also share that if I did make a budget, and then needed to use money that wasn’t budgeted for? Well, I just blew the whole thing out of the water saying “I can’t do this. This never works.” The idea is to not be too much of a perfectionist. Especially at the beginning.
The fact is that so many of us have no idea how much we spend on certain items every month – My suggestion is to take the first month to just keep track. I mean EVERYTHING. Write down everything you spend money on. I guarantee that just by writing everything down, you spend a bit less money on things you don’t need!
The cash envelope system was the FIRST budgeting system that worked for me – and it’s pretty fun. You are welcome to download a list of my budget categories – I have used these specific categories for about four years now. I still need to move money around a little bit each month – and this is OK!
Now. Do you use credit cards? Do you pay them off in full every month and ONLY use them because of cash back or other types of rewards? If so, then you can use “pretend” cash. (keep your receipts in the envelopes instead!)
If you have a credit card with a balance you have not paid off – you need to put that credit card away and add in a “paying off credit card debt” category in your budget. ONLY USE CASH. If you do not have the cash for it, you do not buy it!
Let me repeat that! If you do not have the cash for it, you do not buy it!
(This does not include the monthly bills you can automate to be paid directly from your bank.)
Here’s an idea of how it’s set up:
MONTHLY BILLS: these will be the same every month. Pay them automatically from your bank –
- insurance (renters, home, life, car, etc.)
- car payment
OTHER MONTHLY BILLS: you want to put cash in these envelopes:
- dining out
- spending money
MONEY TO HOLD EACH MONTH: I transfer this money each month into a savings account –
I keep a spreadsheet of what I put in each month and what the balances are. You will not believe how wonderful it feels to have your vacation money waiting for you! Put just a little bit away every month. My last bill at the vet was over $500! I hadn’t saved all of it because that was more than I ever planned on spending, but I had almost all of it sitting in my savings account, and it barely messed with my monthly budget. Glorious? Yes! Glorious!
- pet bills
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PAY YOURSELF: try to make this an automatic payment as well. Savings account, mutual fund, work 401K?
(If anything – just pay yourself, don’t forget!)
A) what is your TAKE HOME pay every month? That’s your starting dollar amount. We’ll call it A.
B) now subtract from that dollar amount (A), all the bills that you are going to automate. We’ll now call it B.
C) now subtract from that dollar amount (B), the amount of money to pay yourself, and to put aside (vacation, pet expenses, medical expenses, etc.) We’ll now call it C.
D) What’s left? That is the ONLY money you have left to use for your cash envelope system. Get the cash, split it up into your envelopes. This would be a great time to call cable companies and insurance companies and see if you can get a better rate. It’s easy to be lazy about making the calls and asking for a reduction in cost, but every little bit counts – and it’s YOUR money! Try to hold onto it!
I use small manila envelopes –
Feel free to download sticker templates to put on your envelopes:
What if you go over your budget and don’t have enough money in an envelope and you MUST buy something?! (your child told you that she was bringing cupcakes to school on Thursday and you need some ingredients you hadn’t budgeted for) – it’s OK! You may need to BORROW from another envelope (spending money) – and that’s ok if you MAKE SURE TO TAKE THE MONEY OUT OF THE SPENDING MONEY! It’s the only way. But be honest with yourself. If it’s something you don’t urgently need (like cupcake ingredients, I mean, prioritize people) then DO NOT BUY IT.
Do. Not. Buy. It.
This system gets you hyper-aware of where your money is going. It’s incredible! Maybe you want to order lunch tomorrow with the girls at work? Well, you used your dining out cash last week and have no money left in your envelope. Guess what? MAKE YOUR LUNCH!!!!!
After several months, you will intuitively know (trust me, you will!) what categories you are short in every month, and what categories you have a little left in at the end of the month – and you can readjust. Just make sure you are
1. investing or saving money every month
2. automating the bills that are consistent every month
3. putting away the money you will need a large chunk of later on (vacations)
4. Putting the cash into the appropriate envelopes, and keeping track of what you are spending!
If you have money left over in any of the envelopes at the end of the month – put it into savings, or put it into your spending money envelope and have some extra to spend next month!
The cash envelope system changed my budgeting habits for good. If you are interested in seeing what my list of budgeting categories are, click here. If you would like a free download of stickers to put on your envelopes, please click here. (I use Avery 8168 shipping label stickers, but you can cut out regular paper and glue the paper to the envelope if you want!) And if you want the same envelopes as I use? I use these – I love them! But any ordinary envelope will work – as long as you keep track of what goes in, and what goes out – you’ll do great!
Good luck and have fun!