Getting Started With a Cash Envelope System

Managing money is tricky business when swiping a debit or credit card seems so easy. You don’t have to pass a second glance at your budget and all seems well, but this almost always leads to overspending and overdraft fees. Before you know it you have blown your budget and the guilt seeps in. I had to deal with that guilty feeling on more months than I like to admit so I sought out a way to combat the mindless overspending. The financial solution that I have found is a simple & effective cash envelope system.

My current budget and cash envelope systems go together like honey & coffee.The envelope system sweetens my budget and together they make sure that I don’t ~~lose my mind~~ (whoops…that’s the coffee)…lose my money. So how does this system work?

What is a Cash Envelope System?

A cash envelope system is a financial system in which you use cash only for all purchases (auto payments that come out of your checking excluded). Cash is taken out of the bank each pay period and separated into categorized envelopes. Once the money in the envelopes is gone, it’s gone until the next pay period. This system will help you to save money & become more aware of your spending habits.

How to Set Up & Use Your Cash Envelope System

A cash envelope system isn’t something that you can jump into with no prep work. You must prepare your cash and your budget for this system to be successful. There are four steps to take before you get started on your cash only journey.

1. Decide on your Cash Envelope Type

First, you are going to need to choose your envelopes. I started out using plain white mailing envelopes, but I found that I would take a few in my purse, a few in the car, and a couple more were left to hold the house down. I would forget where they all were & I quickly realized that I needed another way to keep all of my categories together.

Less than $5 and a Wal Mart trip later, I had a pocket accordion file folder, washi tape, and a paint pen ready to go. This original set up wasn’t the most stylish, but it was definitely effective…Recently, my mother and I worked together to make this cute little wallet as an upgrade from the accordion file folder. I LOVE it!

For those of you who want something pretty, but don’t want to make it yourself, I recommend the Savvycents Wallet 🙂

You can use regular envelopes, an accordion file folder, a sectioned wallet, page protector sheets, index card file folder, whatever works for you! The Dollar Tree and Wal Mart have lots of neat options.

2. Choose Your Cash Envelope System Categories

Now you need to label each category. My categories include Tithe, Diapers & Wipes, Gasoline, Groceries & Household Items, Eating Out, Savings, and Miscellaneous Spending. You choose what works best for your family.

3. Determine Your Budget

My husband and I sat down with our budget to determine what we wanted to put in this folder and how much money should be devoted to each category.

Be realistic when setting your numbers. If you allocate less money than you actually need in each category per month then you will end up feeling defeated.

4. Stuff Your Envelopes

You are ready to go to the bank! Ask the teller for a specific number of $100s, $20s, $10s, $5s, and $1s so that you can place the right amount in each folder. Fill up the envelopes/folders and give it your best shot! You can refill weekly, monthly, bi-weekly, whatever works for your pay schedule. I refill every other week so I have to be sure that the cash on hand will last for two weeks.

Here comes the tricky part… Don’t touch the plastic! Obviously you can use your card to pay online bills and things of that nature, but use only the cash for groceries, diapers, clothing, gasoline, and other miscellaneous spending. If you use your debit or credit card as a safety net then you are defeating the purpose of this system. I fell back into my plastic safety net and I ended up with over $10,000 of debt in just one year. Learn from my mistakes and cut the card!

Why Does the Cash Envelope System Work?

When you use a credit/debit card, your money is abstract…It isn’t something that you are physically seeing & feeling as you pay for your items. Not seeing your money as it leaves your hand makes it much easier to spend it all.

Using cash only turns your money into tangible object. You can see it, feel it, and smell it as you hand it over to a cashier or vendor. There is something about seeing that green that makes you want to hold onto it a little tighter. When you are able to see the cash left in each envelope, you are much less likely to spend that extra $5-10 on something that you really don’t need. You can’t overspend with this system as long as you keep the plastic put away.

Leave Room for Grace

Understand from the beginning that there is a learning curve to this system. Trial and error is the name of the game and while that can be frustrating, it also helps you refine your budget and find your own strengths and weaknesses. If you set the budget too low in a category or two and you run out of money before the next paycheck, don’t sweat it…Just readjust and try again. I still adjust my budget and envelopes periodically to mesh with our ever-changing circumstances. Don’t beat yourself up if you don’t get it just right the first time.