I'd like to talk today about the "Envelope Budget" or the cash-only method. I'd like to suggest that you'll actually save money every month by using cash. Seems like a contradiction right? I’m suggesting that by spending CASH (note – not debit, credit cards, or checks) but hard cold CASH, you’ll actually SAVE money! We are a cash-only family – simply put if you can pay cash for it, you should. I know at first it might sound crazy, you might think if I have cash I will just blow it! However, I think quickly you will see just the opposite happen. You will begin to ask yourself, do we really need this? You will find yourself meal planning. You will find yourself with money at the end of the month.
“When you pay cash, you can “feel” the money leaving you. This is not true with credit cards. Flipping a credit card up on a counter registers nothing emotionally. A study of credit card use at McDonald’s found that people spent 47% more when using credit instead of cash. This is money you could have saved!” – Dave Ramsey
We do not pay cash for any bill that can be paid through our online bill pay, and I highly suggest online bill pay – it’s free and you’ll never incur a late payment again. We get our cash out each week and divide it up between our envelopes, some of them accrue while other are spent each week.
For example, our Car Registration envelope accumulates while our Grocery Envelope is spent in full each week. The difference is that you do not want or need for your Grocery Envelope to have excess, it is not a “savings account”—if you have extra money in there every week, I’d bet that there's another category that could use a little bump up or, if you’re working on paying down debt, it should absolutely go there first.
Hopefully these steps will help you to understand the process...
Step 1 – Define your categories. What can you possibly pay for cash with? One key here is to only include categories for things that you can’t pay online or through an invoice or bill. Anything that doesn’t come as a bill in the mail is probably a good candidate for cash.
Here's a list of our envelopes. You may notice that we do not have an envelope for gas. It’s not that we don’t have it budgeted; it’s because I don’t want to leave the kids in the car while I go into the gas station to pay the attendant. We use our debit card for this expense. You’ll need to figure out what best fits your family's needs.
4. Gifts (Birthdays, Christmas, etc)
5. Date Night
6. Eating Out
7. Spending Money
8. Car Maintenance
9. Kid’s Date
10. Kid’s Allowance
11. Trip Money
12. Car Maintenance
13. Car Registration
14. Hair Cuts
15. School Supplies/Events
Step 2 – Determine how much you spend in several categories per month, ie. groceries, toiletries, clothing, etc. Not while on a budget, but what you have spent on a regular basis. This make take some time, and you may have no idea because you haven’t kept any track at all so you may have to start this process now for the next 30 days. Now hold on to your seat, you’re going to be shocked.
Step 3 – Figure out how much you THINK you will NEED in each category. The key here is to be flexible, because it will change. It will change more than once, twice, and possibly even three times. Life is always changing and so will your budget. Another baby? Up goes the toiletry budget! Or maybe you just potty trained your 2 year old, well that saves $30 a month!
Step 4 – Get the cash! We go every week to withdraw our cash, it is easiest if you can keep it to an even $20 amount so you can go to the ATM machine at your bank, saves you a trip inside the bank. This has got to be the best part, it’s like playing a game of monopoly. Divide your cash, you may need to go into the bank every once in a while to get $5’s, $10’s, etc depending on your envelope amounts.
Step 5 - Start saving money! When the envelope is empty, that’s it, your money is gone and you CANNOT purchase anything in that category until the next envelope payday. But remember, the first couple of months you need to be flexible. Also, please remember to make your budget realistic, if you undercut yourself too much, you will give up. So that is why my family has an eating out budget, because the reality is, while we shouldn’t eat out, we do. We put $15 a week into our eating out budget, if we save it up we can go out to a sit down dinner, otherwise it gets us a pizza night once a week.
“Hey I just wanted to share with you that after starting the envelope system 3 months ago we have finally met budget AND we were able to UP-IT! Also my husband told me the other day that for the first time he doesn’t feel like we are living paycheck to paycheck. We are buying things dirt cheap before the real need for them hits. It has been a hard but wonderful journey. One I really didn’t think we could do! Thanks so much.” – Cassandra
That is just one of hundred’s of reader’s experiences. I’d LOVE to hear about yours in the comment section below. Do you use cash or an envelope budget system? What does it look like for your family?
See the first post in Julia's series here: Saving Money by Meal Planning.