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This post is all about what the cash envelope method is, how it works and the cash envelope method can easily help you save more money.
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What is the Cash Envelope Method and How Do You Even Start?
By now you might have heard about the cash envelope method already. If you haven’t and are still asking yourself what is the cash envelope method and how does it work, then go ahead and enjoy this detailed article.
The cash envelope method requires you to rely on cash-only for most, if not all of your expenses. Thus, it requires you to have enough cash to even start using this method. Once you have created your budget and you have established your budget method (for example, a zero based budget), you can start using the cash envelope method.
Simply put, the cash envelope method works as follows:
You are using cash and designated envelopes to pay for everything or most of your expenses. You create different envelopes for the different expense/spending categories and allocate -based on your budget- the dollar amounts in cash to each envelope. You can use cash envelopes whether you get paid monthly, weekly or bi-weekly.
What this system requires of you is to keep track of all expenses when pulling out cash from the different envelopes to pay for expenses as you only can spend the money that is allocated for each expense category.
There are ways to give yourself a bit more wriggle room but we will get to this later.
The cash envelope method is a great way to become more in tune with your expenses and spending habits. Whether you are tackling debt, want to stop using credit cards or if you simply want to change your current budgeting method to the cash envelope method, there are many benefits to this method which we will get to shortly.
Dave Ramsey says that people who will start using cash will have a better grip on their money. They do not want you to rely on borrowed money, such as credit cards. Opponents to the cash envelope method will claim that using cash will tempt them to spend even more of their money.
One thing is for sure, the cash envelope method is easy to implement and could be a success factor in controlling your spending habits. Most importantly, the cash envelope method will assist you in developing a better relationship with your money.
Step-By-Step Guide: How Do You Use the Cash Envelope Method
Why Should You Even Use The Cash Envelope System
The cash envelope system is easy to use once you get the hang of it. This method will require you to track every expense as mentioned earlier, so you have to be very strict with yourself. When you have only a certain amount allocated towards your individual expense categories, then that is pretty much it. You won’t be able to spend more.
The cash envelope system will help you not to go overboard with your spending, unless you take money from another envelope but I wouldn’t advise doing this unless it was really an *emergency* and you needed to pay for something.
Start With Your Paycheck and Budget
The first thing you want to look at is your paycheck and pay period and then create your budget. If you already have your budget established and know what expenses will come up then that is excellent. If you have not, then I suggest you start creating a budget right away.
List all of your expenses on a piece of paper, excluding expenses that are being paid by a direct transfer or pre-authorized debit. The reason why you don’t want to include these is, because they are usually fixed and are electronic payments. So no need for cash.
How Do You Choose The Cash Envelope Categories
You will know which categories to choose for your envelopes when you’ve established your budget.
Some of the categories used with cash envelopes can be:
- Household such as toilet paper, cleaning supplies, etc.
- Groceries/Food
- Eating/Dining Out
- Gas
- Fun (activities that you or your family like to do on the regular)
- Pet
- Beauty/hair cuts
- Miscellaneous (*some people do not like a miscellaneous cash envelope but if you have nothing against it you can use it for when unexpected things come up)
Instead of putting categories like food and household together, you will have to separate so you will know better how much you actually spend on groceries. Keeping a separate envelope for eating/dining out is also a good idea especially if you go through your expenses and want to see how much you’ve actually only spend on groceries versus going out to eat.
I added the gas category because if you are an all-cash spender then this is what you would do. However you don’t need to add a gas category for the cash envelopes as we normally don’t overspend on gas. We only really fill up our gas when we need to.
Fun could include activities, such as going to the movies to the zoo or getting ice cream.
Whatever “fun” means to you, you’d allocate enough toward this envelope so you won’t overspend. Pet, beauty, and miscellaneous could be a few more expense categories if they apply to you. If you are planning to do the cash envelope method with your significant other, categories such as poker night or night out with the girls / guys could also be a category to add if it applies to you.
You definitely have to create a budget before you start the cash envelope method. Look at all of your expenses so that you can create your cash envelopes and then allocate enough money towards each category based on your written budget for that pay period.
How Much Cash Do You Need For Your Envelopes?
You know how much cash you’ll need for your envelopes from having created your budget and listing all of your expenses with how much you normally spent in each category.
If you don’t know how to create a budget, then I suggest reading this article to help you get started.
The amount of money you’ll need is largely based on your paycheck and pay period and of course, anything that you plan to spend money on during any given pay period.
You can either take out all of the cash for your envelopes at once or go by your paycheck / pay period.
For example, if you get paid once a month you would take the amount of money needed for your groceries and divide them by 4 (weeks). If you do your grocery at least once a week, then you’d have enough to get you through that one week for groceries. If you get paid more than once a month you’d divide the money by 3 or 2. For example, you get paid twice a month, on the 15th and 29th, you take $600 and divide them by 2. You would have $300 for two weeks.
You also want to know the denominations for your cash envelopes. Write them down for the bank teller.
How Do You Add The Money To Your Cash Envelope Categories
After you have gone to get the cash from the bank, you will want to distribute the money into the different envelopes (categories).
In cash-envelope-method-lingo, we call this envelope stuffing. It’s a satisfying activity for many who use the cash envelope method.
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How Do You Use The Cash Envelope System Effectively
When you first start using the cash envelope method/system, you will need some time getting used to it, especially if you’ve relied on your credit cards. Since credit cards have the benefit of tracking all expenses and are logged on your monthly statements, paying in cash will be a much different process.
For every expense you will have to write down your expense. You can use an index card or have a tally/table on the outside of your cash envelopes. You can also keep the receipts in the respective envelope and write down the transactions made at a later time when you get home. However if you choose to do this, make sure that you actually take the time to write down your expenses when you get home, or else it will be very difficult and a lot of work to account for the expenses for each of the envelopes.
For example, if you were to go grocery shopping during one pay period and you had $100 dollars, you would start with $100. Let’s say the next day you were going to the shop to buy eggs, butter and milk which would total to $12.76. You would pull $15.00 for the purchase. You would end up with two one-dollar bills and 24 cents.
Usually you would write down on your index card, “Groceries” and $12.76. After this purchase, you would still have $87.00 to spend in that period on groceries, which go back into the envelope.
But how to deal with the small change you get back from the cashier?
What Do You Do With The Small Change?
In an effort to make it simple for you, you could simply log the expense on your index card or the back of the envelope as $12.76 and put the two one-dollar bills back in the envelope. When you receive small change back from paying with cash, one method is to put it in a coin purse, and later deposit the small change into a money tin for any particular future savings goals. This way you won’t need to deal with small change when out paying for purchases.
Can You Roll Over Your Money and How Do You Do That Exactly
This is the “wriggle room” I was talking about earlier. Even though you might spend all of your money from one category, you could potentially take some money from another envelope. Make sure it’s really worth spending that extra money on whatever it is you want to purchase.
You’ll have to write down a withdrawal from the envelope you are taking out the money and write down a deposit for the amount of money that is coming into your empty envelope. That way you are making sure you are tracking correctly.
Of course you can roll over your cash from one pay period to the other. Just because you have a set budget and money to spend in a certain category doesn’t mean you actually have to spend it. You can save it and roll it over to the next pay period. Make sure you add the amount of money you are rolling over by writing down the roll over transaction.
Can You Use The Cash Envelope Method If You Use Your Debit Card
A lot of people are always asking whether you can do the cash envelope method with your debit card.
I get that, using a debit card is convenient!
The tracking of expenses will be much like when you are paying with a credit card, only that you are paying in cash with your debit and not putting purchases on credit.
When you use your debit card, you could still use the envelopes with the different categories. You won’t be paying in cash but you’d still be writing down all of your expenses on the index cards or back of the envelope.
You’d have to make sure you don’t go over your budget with a debit card but generally speaking, you could still use the envelope method with a debit card.
How Can You Make Online Purchases With The Cash Envelope System
A lot of people are confused when they start using the cash envelope method of how to go about online purchases.
It’s actually really easy.
Let’s say for instance, you were making a purchase for the expense category “clothing”. You would first need to have an envelope labelled “clothing” and allocated money towards that envelope category. In this case, we will use $150.00 as the budget.
So now you are making an online purchase with your debit card. First, you would need enough money to not overdraft your checking account. If that is covered, then right after making the purchase of let’s say $68.00, you would take $68.00 out of the “clothing” envelope and deposit that money right back into your checking account. The result is that you would not spend more than what you had originally budgeted for that category.
You would then write down on your index card, $68.00 (withdrawal) and the purpose, for example, “Online Shopping”.
You now would have only $64.00 in cash left in your “clothing” envelope for that given period to spend.
What Are The Benefits of the Cash Envelope Method
Just like there are benefits from using credit cards, there are benefits to using the cash envelope method.
One of the major benefits of using the cash envelope method is that you actually get to control your spending. You are handing over cash for your purchases and not just a plastic card. Handing over cash is way harder than using your credit card.
It hurts to hand over that $100-dollar-bill. It also opens your eyes when you spend $20.00 here and there. You actually see your money leaving your wallet. This alone has a huge impact on your spending habit.
Another benefit is that you will not get tempted to spend more than you have allocated for each of the envelope categories and that every purchase is actually planned for. This will eliminate those random times when you run to the grocery store. Now, you will create a meal plan, and buy only what you need and can afford. It will save you big!
What Are The Cons of the Cash Envelope Method
One, you will not be receiving credit card rewards.
This isn’t so bad for you if you’ve stopped using credit cards because you’ve accumulated too much debt. However, using cash only, you will definitely miss out on travel rewards or cash back.
Another con is that you can’t be as spontaneous as you were before when you are out shopping. You need to plan ahead with cash envelopes. You need to know where you are going to be and what you are going to be buying. This can be somewhat of an inconvenience.
Something that could happen but doesn’t have to, is of course losing your cash or having your cash stolen. It’s a security concern of walking around with cash envelopes. You should only ever take out the cash envelopes that you need during a normal day. Don’t carry all of your cash with you. Keep your cash safe because cash is not insured. When you lose it or it gets stolen, there’s not much your bank can do.
Why Should You At Least Try The Cash Envelope Method
You should definitely try the cash envelope method if you really want to take control of your spending habits. If you are trying to pay down debt, paying for expenses in cash will really help you on your journey of becoming debt free.
Especially if you want to stop using credit cards all together because you no longer want to continue to accumulate debt starting with the cash envelope method and paying for everything in cash immediately is the best idea ever.
The cash envelope method allows you to grow a better relationship with your money. You will start making an emotional connection with your hard earned money because handing over physical cash hurts!
The cash envelope method requires you to keep detailed track of all of your expenses. This means you will have to monitor your spending closely. Once you run out of cash in any of your set categories, then that’s it. You cannot spend more money only the money you had allocated towards that category.
See, credit cards do not allow for this. With credit cards you are spending “invisible” money that is not even yours! This is exactly why the cash envelope method or system is great for people who are constantly swiping and tapping without self control.
Final Note: WHAT IS THE CASH ENVELOPE METHOD AND HOW DOES IT WORK?
The cash envelope method is a great way to start saving money because you will only make purchases with cash. You will no longer use credit cards (borrowed money) but instead, budget and allocate enough money to each of the spending categories so that you have enough money to spend without going overboard.
The cash envelope method is great because it teaches you how to control your spending habits and makes you aware of all of the purchases you continue to do each day.
When you embark on your debt-free journey, the cash envelope method is easy to use and will help you stay consistent with your spending while also helping you pay off your debt as you no longer
This post is all about what the cash envelope method is, how it works and the cash envelope method can easily help you save more money.