I wish I would have known the cash envelope method in 2011
I was laid off in September of 2011
My wife’s income was the only source of income at that time
Anyway I know it now and I want you to know about it
I will discuss it below and I will start with the following
What is cash envelope system
The cash envelope method or system is a mechanism you follow to force yourself to stick to your budget
You replace all payment methods which you use to pay for your expenses
Like debit or credit cards with a carry on envelopes loaded with cash
You cannot use it for paying mortgage/rent and utilities as those already get deducted from your bank account
Why the cash envelope system is successful
The cash envelope system or method is successful
Because it forces you to use the cash inside any particular envelope with great cautions
Also it raises your awareness and concern to always count your cash to track your progress during the month
For example, if you assigned $450 for grocery envelope and in the middle of the month you find that you have spent $275
This means you have $175 left for the remaining 2 weeks
First, you would learn to track your spending more frequently like after every purchase
Step by Step to use the cash envelope system effectively
Before you start using the cash envelope method you have to prepare a plan to use this method effectively
This will lead me to discuss the following steps below
1- Start with a budget
This is what we call it to create a personal budget to know if your income covers all of your expenses with almost no leftover of any cash
This means you have to think about a way to save on your expenditures
Or your income covers all of your expenses with some cash to save
But again you have to plan to save for your retirement and to build an emergency fund
2- Choose the expenses to spend as cash
Look into your budget to see all expenses you have control on
And where you spend them by yourself with any payment method
3- Figure out your bills
This step is very important as not all the bills go out on the same day
You can have the rent on the 5th of the month while your cell phones on the 27th
This means you have to deduct the bills from your paycheck which is almost biweekly for most of us
Now check to see how much cash left in every paycheck
Add the contributed amount to the cash envelope based on the percentage to your paycheck
For example, if you earn $1890 income biweekly and you pay $900 rent as a one time payment
This means you can contribute less money to your cash envelopes until your next paycheck which does not have that big bill
4- Divide your cash envelope system by your paychecks
In simple words, if you assign $450 for the grocery then you have to contribute $225 from every paycheck
Actually that is not the ideal scenario
I mentioned earlier due to the fact that you have bills due that can deduct automatically from your bank account
This leads to have your paychecks net amount not exactly the same during the month
One paycheck can pay the rent so you have to compromise the contributed cash to your cash envelope method
5- Prepare your cash envelopes
I mean by preparing your cash envelopes finding a way to distinguish your cash envelopes from each other
If you bring white envelopes and you write on each envelope the name of the expense
This approach is not practical as you have to check your envelopes every time you pay for an item
I recommend to get a different distinct color for every cash envelope
After some time you will start building a habit to recognize the expense by its color
For example, when you spot the green envelope in your bag, you instantly realize it is for paying your grocery
Advantages of cash envelope system
When using the cash envelope system you have a surefire technique not to exceed your estimated budget
Because you force yourself to meet it by paying cash from your envelopes
You associate it with the saving habits
And so you save easily without worrying you have to deduct money from your planned saving due to an expected amount you have to spend
Disadvantages of cash envelope system
1) Getting started with the cash envelope method can be confusing and discouraging at the beginning
2) Cash envelope method always keeps you worried because of carrying a lot of cash in multiple envelopes
3) It is very hard to convince your whole family carrying cash is the only way to stick to your budget
4) You have to go to the ATM machine frequently unless you cash out the lump sum amount in advance
5) You will not collect any credit card rewards at all
Experience of those who used the cash envelope system
The cash envelope method is not for everyone
But for those who followed it to adjust their bad spending habits and put themselves back into following their budgets
They noticed the following below benefits occurred to them
1- Spend less money
Of course they spend less money because they can never exceed what is inside the envelope
Assuming you don’t take money from another envelope
Even if you manage to spend less from the other envelope which you have withdrawn cash from
2- Save more money
Saving money becomes easy now as you can deduct your savings from each paycheck in advance
This happens before you distribute your cash in every envelope
3- Become more analytical
The fact of not swiping your credit cards make you more analytical
It forces you to calculate your spending before you go to the cashier
Also it forces you to drop some items from your cart to adjust the planned cash you intend to pay for this expense during your shopping trip
What to do if you have spent all the cash
I am a practical person
I would say blatantly that when following the cash envelope method It can happen to you that you finish your cash in one of your envelopes before the end of the month
If you manage to spend the rest of your month without spending from this particular envelope
This will teach you a lesson to properly manage spending your cash wisely
if you break your budget I hope you learn from your mistake
And find out what went wrong and promise yourself not to do it again
Keep in mind I assume you have properly selected a reasonable amount on any particular expense
And have not gone unrealistically crazy assigning an impossible amount to achieve
Like assigning $150 for grocery and forcing yourself to do it
Where should you keep your cash envelopes
One of the frequently asked question is where you keep your envelopes
If you are using a carry on bag, you can keep your cash envelopes inside
Don’t worry nobody expects that you carry a cash inside your bag
If you are the man and you carry only a wallet
Anyone of us knows in advance where you are heading so you should only pick the envelope you are going to spend the cash from
Can I use my debit card instead of cash envelopes
I am not against using your debit card instead of carrying your cash envelopes
But I would assume you show some responsibility following the cash envelope method first for 2-3 months to build the habit of spending wisely on every shopping trip
Then you can switch to the debit card spending
But please use a budget app like Goodbudget which is based on cash envelope method
What to do with the extra cash
In my humble opinion
You can get a sense of getting extra cash on any envelope based on your spending habit during the month
For example, if you are on your fourth and last week of the month
And you have $200 left from your $450 grocery cash envelope
This means you almost 45% left and likely you will save money
The decision is yours to reward yourself for a dinning out with your spouse or to save the money
Summary of the cash envelope method
Between me and you
I cannot follow the cash envelope method
Not because I teach something hard that I fear to apply it to myself
Simply I haven’t gone to a level of breaking my budget
A level that required me to go through using the cash envelope method
I always practice austerity and I spend wisely especially when planning for a family budget
I hope you stick to your budget and avoid any common budgeting mistakes
Where you don’t end up using this cash envelope method
Now if you need to learn more about budgeting and saving money tips, join my mailing list