How to Use the Cash Envelope System
to Save Money

Whether you’re trying to get out of debt or not, you can probably use some help in making sure that you’re controlling your spending. Contrary to what many believe, the best way to do this is by using cash. If you’re trying to get out of debt, this system will help you pay down your debt.

Understanding the Cash Budget Envelope System
Why a Cash Budget?
When I talk about using cash, the usual response is “If I have cash on me, I’ll spend too much of it.” But, that doesn’t have to be the case. The main reason why people often fail when using a cash budget is that they don’t track what they spend and assign their money a task. The truth is, when you use cash, you spend more wisely.

When you allot $200 for groceries, and you know that your cash has to last you two weeks, it will force you to think before buying an additional item. A cash budget doesn’t let you overspend because once the money is gone—that’s it.

Cash Envelope Categories
It’s quite easy to get started using the envelope system. First, look at your budget. Then you’ll create envelopes for different categories where you’ll place an allotted amount of cash for each month. The following are cash envelope categories that you should consider.
Dining Out
Hair Cuts/Beauty
Doctor/Dentist Visits
Random Spending—spend it how you want to—and only if you can afford to

How much cash do I need?
Once you’ve created your categories, determine how much cash you need for each one. You can figure those amounts out based on your pay periods.

For example, if you get paid every two weeks, take the total grocery budgeted amount for the month and divide it by 2. You will then know how much money that you’ll need for each of the two pay periods for that month. It’s important that you have a budget that works.

Next, review each category that you will use cash for and figure out the amount that you will need. Once you’ve done that, it will be easier if you figure out how many of each denomination of bills you will need. Then, list the total amount by denomination on a piece of paper. Take the list along with a check from your account for the amount to the bank. You’ll make a withdrawal and then split up the cash into each envelope.

How to make money envelopes work
Below is an example of a simple cash budget.

Start with your regular budget
Let’s say that you bring home $2,500 a month. You’ve completed your written budget and have items such as your mortgage or rent, utilities, food, gasoline, debts, and other expenses. You probably pay most of your expenses with a check or electronic transfer. You don’t need to consider these categories for your cash budget. Instead, look at the items that you don’t pay for all at once, but rather over time.

These are the items that will work best if you use cash. These would include groceries, clothing, gasoline, dining out, random spending and doctor visits.

In this example, we’ll only use cash for these items:

Monthly Budget
Dining Out—$100
Random Spending—$80

Determine how much cash you need from each paycheck
The above budget is based on your monthly income. If you’re paid every two weeks, that means that your take home pay is 1,250, twice a month. You only need enough cash to cover half of each of these categories. Your spending budget for each category will look like this for each pay period:

Monthly Budget Divided for Biweekly Pay Period
Groceries – $250
Clothing – $50
Random Spending – $40
Doctor – $25
Dining Out – $50
Total cash needed:  $465 per pay period

Now that you can see what you have budgeted to spend for each category for each pay period, you should determine how many bills of each denomination that you will need to get from the bank.

Getting the Cash You Need
Using the cash budget example above, here’s how you can do that:

Groceries – $250 —- 3 $50 bills, 5 $20 bills
Fuel—$50 — 2 $20 bills, 1 $10 bill
Clothing – $50 — 2 $20 bills, 1 $10 bill
Random spending – $40 — 2 $20 bills
Doctor – $25 — 1 $20 bill, 1 $5 bill
Dining Out – $50 —- 2 $20 bills, 1 $10 bill

You need to get this cash from a bank teller. You can’t use an ATM since it will spit out only 20s and can’t give you the correct number of bills. Write out on a piece of paper to give to the teller that shows how many bills in what denominations you want.

3 $50 bills
14 $20 bills
3 $10 bills
1 $5 bill

Then, write a check for $465, payable to “CASH” and bring it, along with your slip of paper to your bank. The teller will cash the check and give you the bills that you need.

Fill Your Cash Envelopes
When you get home, it’s time to place the cash into each envelope. Take the cash and split it into each envelope, per the list above. Add the amount of the deposit  on the envelope, adding to any amounts that may be left from the prior pay period.
Using the Cash Budget
Once you have your cash and your envelopes, it’s time to put them to work. The only, and I mean the only, way this will work is if you track every single transaction. I’m not joking. Doing this can help you stay on track and you also have to account for everything that you spend.

For example, when you shop at the grocery store, if your total is $20.17, you will pay with cash from your groceries envelope. Place any cash that you get back into the envelope and then deduct your purchase from the balance. So, if you had $100 and spent $20.17, the new total cash that you have left will be $79.83.

Make sure that you keep track of every purchase so you can see how much money that you have left and where it was spent. It helps you monitor your spending at a glance. Once the cash is gone, you’re done spending money.

How to Use a Cash System if You Shop Online
So, what if you do most of your shopping online, how would that work with a cash budget? Can you even do that? Yes, you can. You just hae to handle it a little differently.

The first option is to leave some of the money that you normally get in cash, in your account. For example, if you spend $100 every paycheck through online purchases, take out $100 less in cash. Yu can still account for it by using cashless envelope instead. That way, you can still monitor your spending and don’t blow your budget.

The other option is still to get all the cash that you normally need. Then, if you buy something online, go to the bank and re-deposit that back into your account. You still get the full benefit of using cash and seeing the money come out of your envelopes.

You can still use cash when you shop online, you just have to make a few adjustments.

Why the cash envelope system works
The reason why the cash envelope system works is accountability.

When you make yourself accountable for your spending, you’re taking control. It also helps you send less. If you only have $100 to spend on dining out over the next two weeks, you think twice about ordering take out three days in a row. When the money is gone, you are done spending!

And, it’s not entirely about cash. It’s learning self-control. That’s one thing that everyone will gain while going through this process. It enforces this way of thinking. You will quickly learn to love using cash and you will feel more in control of your finances.

Cash also has more emotion attached to it. You don’t think about the consequences of a purchase when you swipe a card. However, handing over that cold, hard cash can sometimes hurt. You do think about each purchase a bit more.

I’ve been doing this for so long that I don’t know how to shop without my envelopes. It’s routine for me and it helps me always know, in just a few minutes, how much money we have available for the things that we need.

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