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Cash Envelopes are the best way to curve your spending because it has been proven that cash is mentally harder to spend than swiping your card! This system is nothing new to the budgeting world. In fact, this is probably how your great-great grandma carried her budget! If it worked for her, it could definitely work for you!
Cash Envelopes are exactly what they sound like. Envelopes or Clips to hold cash that is specifically allocated for a certain category. Things like eating out, groceries, and misc/personal spending are usually the most popular categories for your envelopes, but they can be so many more than that. Cash envelopes allow you to assign a certain amount of money to a category. Once the money in that envelope is gone, there is nothing left for you to spend! They take a few months to get the hang of, but soon you will be rocking and rolling your way to spending less!
How to Set up Cash Envelopes?
Gather all of your materials
To get started you will need envelopes, a pen, a small notebook (small enough for a piece of paper to fit inside of the envelope), clips, and a place to put them! I also use sticky notes to label each clip. I use an old recipe box to keep all of my envelopes organized. The old, decorated milk jug is my coin jar where I put all of my loose change. It actually adds up pretty quick and it is a nice extra $50 every other month. I have seen people use all different kinds of envelopes as well. There are plastic envelopes (which will hold up a little bit longer), or paper envelopes with a ledger if it makes it easier for you to track. Or you can decorate your own. I started with basic office envelopes, but I have been thinking about upgrading!
Make a list of budget categories that cash spending would help with
These can be all different kinds of things based on your budget and your family. Because I am a waitress, I have envelopes for EVERY category that I spend plus all of my bills. Check out my guide to budgeting as a waitress. Some people may choose to only do a few categories. Pictured below is my list of categories that I use for my cash envelope spending. Each one will get labeled with its own envelopes. At the end of this post is a printable with over 70 budget categories if you are having trouble coming up with what you will need!
Assign an amount to each category.
This is where you decide how much and how often you will fill each envelope. There are a few different ways to fill them, but ultimately the amount is up to you and what works for you.
Monthly: You can decide to fill the monthly if you have extreme self discipline. This is usually how I do it so I don’t have to keep revisiting the same envelope. The good part about it is that if some weeks are different than others. This allows you to spend it when you want throughout the month without waiting.
Pay day: You can also use paydays as a benchmark for filling them. If you get a direct deposit on regular days, it might help to just pull the cash out every pay day and fill them all at once.
Weekly: If you are just getting started, this might be a good option. This allows you to have a little money at a time, but also gives you the option to save some of the money for the next week if your purchase is a little bigger. This isn’t a great option if it is inconvenient for you to go to your bank to pull the cash out of your account, but a great option if you have a cash based income.
Create a ledger for the envelope
Inside each envelope, I have a small piece of notebook paper to write down my purchases as I spend money from that envelope. I personally use the monthly filling system to make it as simple as possible for me. Creating a ledger has helped me to track the expenses and how often I am actually spending money in each category.
It will take a few months of trial and error to see how much money you actually need in each envelope (or if you just need to cut back on your spending in a certain area.) I also use these envelopes to save for big expenses like vacations and Christmas because I save a little bit each month for these expenses with my sinking funds.
Spending With Cash Envelopes
Change or no change?
There are also a few different ways to do this. When I spend money from an envelope, I fill out the ledger as an even amount. So if I spend $4.87, I write $5 on the ledger and the spare change goes into my coin jar. Usually my change jar adds up to about $75 when it is completely full, which makes a great extra debt payment (or a splurge for me to get my nails done and then put the rest towards debts!)
Some people will keep the 13 cents in the envelope and budget down to the penny, but I have found that the spare change is nice bonus money throughout the year. This works if you keep a really tight budget and want to make the most of every penny.
Wallet or at home?
This is totally up to you. Many people will have their main envelopes in their wallet at all time. There are a ton of cute wallets for cash envelopes if you are in the market for a new wallet. My envelopes fit perfectly in my wallet, but I only carry my grocery and restaurant envelopes with me. Keeping them in your wallet might mean that you spend a little more because it is always on you. But it also means that you aren’t spending money from another category while promising yourself to pay back the other envelope when you get home.
Keeping them in a safe spot at home is another great option. This helps when you are trying not to spend money. I keep a lot of my envelopes at home unless I am planning out a specific purchase from one of the envelopes. If I know I am going shopping for home decor, I will take that specific envelope at home. Keeping them at home helps because it doesn’t feel like I have to spend that money. Keeping them at home might mean that you have to drive back home to get the envelope (Dave Ramsey has joked about driving across town to get the restaurant envelope when they forgot it.) But it also might mean that once you get across town, you have talked yourself out of the purchase anyway.
Rollover or Debt Payment?
When the month is over and there is still money left over, it is up to you whether to keep the money in the envelope for next month or make an extra debt payment/ put it into savings. Putting it towards debt every month gives you an incentive to only spend the cash if you need something out of that category. It can be great for you to challenge yourself to spend as little of your “beauty budget” for the month knowing it will go towards debt.
Rolling over the money into the next month is great if you are saving for a specific purchase. Every month, I put $20 in an envelope for supplements and vitamins, even though I only purchase them every 3-4 months. This allows me to have enough money for them when I need them without having to worry about getting the money all at once. The same can go for Christmas or a furniture fund. I treat most of my envelopes like a sinking fund.
Clips or Envelopes?
Many people have gone away from the envelopes all together and have started using the binder clips to hold their cash categories together. This is a great way to keep cash organized in your wallet if the envelopes don’t fit into your wallet. It is a little bit more organized and compact. Envelopes are still a great way to organize them if you want to decorate them. You can also keep the change in an envelope if you so choose to, where you couldn’t with a clip. I don’t think that either way is better than the other, it just depends what works better for you. Both options are relatively cheap!
Cash or Credit/Debit Card?
You have to know what is best for you. I know many people say that they spend way more money when they have cash in hand. You might for the first month that you do cash envelopes, but after a little practice, I can guarantee that you will spend a lot less.
If you go into a store with $40 cash and no credit/debit card, I promise that you will spend less than $40 in that store. The trick is to not have your debit or credit card as a back up. I have stopped carrying my credit cards all together. My debit card is only in my wallet for gas purchases for my vehicle and I don’t take it with me when I go into grocery stores. When you don’t have a back up option, you stop spending money on extra stuff.
Research has shown that cash has a stronger emotional tie to it. When you spend cash, it triggers your brain a little bit more. I don’t know if that is the reason for the change in my spending habits, but it has definitely helped. Using cash envelopes can be a little tricky and a little messy at first. Once you get the hang of it, it will completely change your budgeting and spending. Dave Ramsey talks about the cash envelopes in one of his lessons. He said that he knew they had changed their spending habits when they had to turn around to get an envelope because they couldn’t spend any other money.
Is there something that you do differently with your cash envelope system? I would LOVE to learn if there is something that I missed or could do differently!