I’ve been using the cash envelope system for 2 years and 10 months now, and I have to mention that I don’t plan on stopping just because I’m debt free. I also don’t plan on throwing my budget plan out the window just because I am out of debt. Instead, I’ve realigned my budgeting for other goals I’d like to achieve.
Besides having a budget plan, the cash envelope system was the second most important thing that helped me get out of debt.
So what exactly is the cash envelope system?
The cash envelope system allows you to manage your money a little more effectively through the use of hard, cold, cash, as opposed to using a debit card—where you can quickly lose track of your spending. You may hear the phrases cash clips, cash system, envelope system, these are all the same thing. Now, I think most people that use the cash envelope system will agree that it isn’t the most convenient way to make purchases; however, it is a very useful tool that I and many others have used to tackle debt.
Here is a step-by-step guide on how to get started:
Nerviano 1. Create a ZERO based budget.
To begin, note your take-home income (your pay after deductions and taxes) at the top of your formally budget plan, then list out all of your expenses (highest to lowest priority) for each paycheck you receive in a month. For this step, you may need to reverse engineer your budget and start with all of the categories for the month, then allocate your money across your two, three, or four paychecks. Allocate every dollar of your income to a spending/budget category, until you have ZERO dollars left.
Example:
2. Determine the categories from your budget that you’ll need to pull out cash for.
Example:
Note: Since every dollar is accounted for using a ZERO based budget, any money used to pay online bills will sit in your account, until you pay the bill or it is deducted using autopay. This is why it is imperative that you leave your debit card at home if you are committed to using the cash envelope system. The only money that you should be using is the money you’ve taken out of your bank account, so you can get into a comfortable system, and develop your own way of using the cash envelope system.
3. Calculate the cash denominations for each of the categories you’ve determined you will need cash for.
Example:
In my Budget Pack excel spreadsheet program, there is a spreadsheet/worksheet that helps you with this as well.
4. Go to the bank, and head over to a teller window to withdraw your cash. Do NOT use an ATM—you cannot get out specific denominations from an ATM. Ask the bank teller for the denominations you need or provide the teller with a written note that lists the cash breakdown.
Example from Step 3:
$1 x 10
$5 x 4
$10 x 7
$20 x 5
Total = $200
5. Label each envelope with its respective budget category.
Click here to purchase Mini Envelope Template (As seen above)
6. Put the cash allotted for each category in the envelopes.
7. Store the cash in a safe place.
Always make sure you keep your cash in a safe and secure place. A fire resistent lockbox in a place where only your spouse/partner/etc know’s where it is at. There are PLENTY of reasons why you want to keep this safe- fires, robbers, kids shredding your hard earned cash (yes, this recently happened to a couple). Just make sure if you are using a cash system, your money is in a safe and secure spot- PERIOD.
Using the Envelopes
I never walk around with all of my cash envelopes; 1) It’s not safe to do that—regardless if you live in a big city or not, anything can happen to your cash if you’re not careful, and 2) you will be more tempted to borrow from other envelopes if you have them on hand.
For instance, say you have a coffee envelope that you carry with you religiously and one day you magically find yourself out of coffee cash. At this moment, you’re given two options that seem pretty practical in your mind—you either go without coffee or dip into another envelope to cover the purchase. Now, let’s be real, when you’re exhausted and the only thing standing between you and life’s nectar is $2, chances are you’re going to dip into another envelope and justify it. I still do this after budgeting for almost 3 years now.
The least amount of access you have to additional cash, the better. Now, I don’t recommend being super strict with how much cash you carry around if this is your first go at using cash envelopes. When you’re first starting out, you should give yourself a little cushion until you get good at saying NO and/or fine-tune your budget.
1. Take what you need when you need it but also remember to manage the money in the envelope.
For example, let’s say that you get paid every two weeks and set aside $100 for groceries. You can either go to the store in one trip and spend all $100 to cover food that will last you for two weeks or maybe you like to go in 2 trips (once per week). If you go in 2 small trips, it may be better for you to break up the $100 into $50 for each week. You would take $50 with you to the store and leave the other $50 at home for next week’s groceries.
You will need to be mindful of how much you are pulling out of your envelopes and how much money you have left. Some people do like to keep a small ledger with their envelopes so they can see how much money they have at any given time and also what they’ve used the money for. You can write this out on a sheet of paper, an index card, or whatever will be the best way for you to keep track of what’s coming in and what’s going out.
Ledger Example –
You can recreate the above ledger using a simple index card or piece of paper.
Keeping a close eye on the balance of your envelopes will not only keep you engaged with your money but will also help you understand your spending habits and where you may need to adjust your cash envelope amounts. For example, if each month you have way too much left over in fun money, and not enough money for personal products, you’ll know where to adjust for the following month.
2. ) Once the cash is gone, it’s gone.
Yes, my friends, all good things come to an end. When the money in your envelope runs dry, its time to sit tight until the next paycheck or time to GET super creative easily when you have a family to food and the grocery money is all gone. The cash envelope system forces you to become super disciplined about your spending and gives you a tangible way to handle your money. The worst thing you can do when the money in your envelope is gone is fall into the debt trap by leaning on your credit cards to bridge the paycheck gap.
The first few times anyone tries the cash envelope system it can be pretty painful and challenging; however, it’s unbelievably worth it.
Other stuff you might be interested in:
- The Budget Pack (***Must have Microsoft Excel***)
- Mini Envelope Template
- The Importance of An Emergency Fund
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