For most of you that know me, you will know that I have been budgeting seriously for the past year and a half now. During this time I have tried every budget method under the sun, from spreadsheets to apps.
The method that resonates with me and makes most sense seems to be the monthly budget model called the cash envelope system. I base my budget around the time I get paid. Not only has it helped me pay off close on $25,000 of debt on one modest salary, it has helped me really understand and get control over where my money is going every month.
I was able to save $1000 for an emergency fund for us, which has led to a more peaceful life for me and my husband, if unexpected expenses come up. With my tracker sheets, I can see what I have spent, in which budget area every month.
This year, I fully funded our holiday spending, just based on cash - I finally ditched the credit card!
So today I will show you how you can rely less on your cards and really benefit from a cash based budget.
What is the Cash Envelope system?
Basically it's all about taking budgeting back to pure cash. It helps you save money by having the money physically in front of you as you pay for items. The theory is that you will be more likely not to overspend, because you are handing over real cash and not just tapping a card reader.
You have different amounts of cash stored in different envelopes. The budget is determined by what you can afford.
If you're anything like me, I tend to overspend if money if it's not in my hand and physical.
With cash envelopes, you can physically see the money - it’s tangible and not just an abstract idea.
You can see the cash reduce as you spend.
Ok, so abstract thought doesn't work for me with money. Mr Budget goes on about - put it on a spreadsheet Elly, it'll save you time. And yes, he's correct, but for all the pretty little spreadsheets in the world, I have never had one that made me actually stick to a monthly budget. As a thirty something, I vaguely remember when my mum used to use cash all the time.
When my time came to manage money, it was all about debit and credit cards, and no REAL coinage in my hand.
When you need to spend your money, because you need to pay at the till, suddenly your budget becomes real, with real rules.
Unlike credit cards or debit cards, where you can just tap or swipe. I always found it easy to convince myself that what I had spent seemed a lot less. It looks so much more valuable when you have it in your hand!
When I first tried out my coffee envelope and emptied it in one week into my budget month, going without coffee stung me for the three weeks I had to wait until the next budget amount.
But because it was real cash, I felt bound to my agreement with myself. I was so pleased that, although it was hideously hard, I didn’t reach for my debit card, to buy more coffee. I knew each dollar had a purpose - each cent was going somewhere to help me pay off debts, or save.
How to Start a Budget Envelope System
Record your spending
It’s important to do this for a month, before figuring out what your categories for variable spending and cash envelopes are going to be.
Tracking your spending is really important, so you need to make a start right now, if you haven’t tracked it before.
Making your budget also involves going through your bank statements to figure out what your fixed and variable spending has been, saving receipts, keeping an ongoing expense tracker, and organising your spend.
What are the categories of the envelope system?
Working out your budget categories.
After a month of tracking your spending, you should see a pattern to your spending and be able to put these into categories.
If you like, you could use one spend tracker and highlight the different categories with highlighter. I either do this, or I separate my spend trackers for different categories.
My process every month, is to keep my receipts from variable spending and to fill in my spend tracker at least every couple of days.
For my budget, I transfer my main budget categories over to my budget sheet.
For example, I have fixed payments for car insurance, car tax, and variable expenses for fuel, and motor repairs. So I grouped these under transport.
Tip - Don’t worry if you get it wrong the first time, or if you forget something. This is perfectly normal and part of learning a new process. I took about 3 months to really get going with my budget and money envelopes.
By tracking your spending, you can see what areas you are spending in. Once you know what your categories are, you need to total up each area.
This will form the basis for any amounts you will give yourself in each cash envelope. My cash envelopes I use for variable spending.
Fixed expenses and variable expenses
Fixed expenses in my budget are bills that go directly out of my bank account and vary very little.
Examples of fixed expenses:
The cash envelope method is designed to be used for the variable expenses within your budget. These involve things that you spend money on that can fluctuate from month to month.
Examples of variable expenses:
Personally, I have experimented with which areas of my budget cash envelopes work for. My cash envelopes are as follows:
Eating out - for anything me and Mr Budget spend (food, coffee etc)
Market - I buy fruit every week from the local market
Coffee - my blog fund, so I can sit and watch the world go by!
Breakfast - my budget so I can grab breakfast when I’m in a rush.
Toiletries - for toothpaste, shampoo (bathroom essentials)
Set limits for each cash envelope category
Now you have made your budget and tracked your spending, set your money envelope budget limits. I do this at the same time, every month. So I determine whether my budget amounts fit and balance when I add everything up.
You will find that every month, you are learning more about your spending and you can adjust your categories.
Mr Budget and I, as a result of cash envelopes, ended up spending a lot less one month than my budget amount of £250 on eating out.
But we overspent on groceries (we were more conscious of eating out!) The next month, I adjusted the amount up to £250 for groceries and reduced my eating out cash envelope to £200.
Make labelled envelopes corresponding with Your categories
After you have balanced your budget, it’s time to make your cash envelopes. I label mine with the month and how much my budget amount is.
Backstory to the cash envelopes. Below I will explain fully, other reasons why I like cash envelopes, but I so love making my own.
Truth is, I researched them online, and they were either boring mail envelopes, super expensive or not able to be organised in the way I wanted them. So I thought - well girl, you should make some of your own.
I have got some resources you can use below, that I’ve created. Keep looking out, because I add them all the time. If you subscribe to the budget newsletter, I send out my subscribers freebie envelopes, trackers and budget sheets regularly!
You might also fancy my free email course on how to make a budget, along with free budget sheets and envelopes.
Decide when you withdraw cash
My rule for this is that I withdraw my cash the day I get paid. My budget for the month, works between payday and payday. If you get paid twice a month, you might want to take your cash out on each payday.
Pay your bills
Ensure that you leave enough money in your main account, to cover your fixed bills. SInce these come out every month, you might want to continue or set up direct debits with when your pay comes out, so you have a balance account.
If you get paid twice, maybe have half of your bills coming out between the 1st through 15th, then the next half exiting your account later.
Other options for paying your fixed expenses, include using electronic pay or your debit card. This avoids you having to run to the bank lots of times to pay them (which would be a hideous waste of time).
How much should I put in a cash envelope?
I absolutely love stuffing my cash envelopes every month. It gives me such a sense of control and peace to know that this cash is the only thing I can use that month.
So if you have budgeted a total of $200 for groceries that month, you need to put $200 in that cash envelope. You can find the information for each cash envelope from your budget sheet.
So I can find the cash envelope budgets quickly across my sheet, I write CE next to each part that I will put in a cash envelope.
Rules for using envelope system
Use the money in each envelope for the budget area it is for.
Try not to use money from one envelope for another budget area.
For example, if you are in the grocery store and as you are shopping, you figure you are about to overspend by £10, put that amount back and keep the essentials. It is strictly about keeping within the budget in each budget area. Challenge yourself to use food from the cupboard, or bulk freeze meals, to cut costs of grocery shopping further.
Try not to Cheat the System
If you run out of money for eating out it can be tempting to reach for your debit or credit card. Maybe cook at home cheaply, using your grocery budget.
If you run out of kids' activity money, think of cheap alternatives like taking them and the dog out to the local park for free, or go for a walk on the beach.
Get to know your pet's quirks, to save money within your vet budget envelope. There are many ways to save further money, by being creative!
Have an overall goal to keep you motivated
Goals can small or incredibly large, to keep you motivated. My original goal, when I started, was to budget so I could pay off debt.
A goal will give you motivation, but also will help you focus on where to put your spare cash.
So now my goal, now I have paid off our debt, is to pay off the mortgage early. (Hopefully in 5 years) Every penny of spare cash goes towards making an overpayment on this.
Treat yourself if you achieve a balanced budget
This is crucial to me and has always been an important feature of my budgeting. This way I stay motivated to achieve my goals. I always think of ways to look after and value myself, so I suggest you do this also, and you will become more excited and positive as time goes on, as you reach your end goals! It might be that you have £15 left over in your beauty budget and you decide to roll it over to the next month. Maybe you love a glass of wine in a great wine bar in town, or meeting up with a friend for a fancy coffee. It's all up to you!
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Questions about cash envelopes from readers
But Helen, money envelopes are so last century - No-one carries cash now!
Why use a cash envelope when it's so easy to use my card?
Cash, as a system, isn't favoured by many people anymore, as manual budgeting can take a long time. Cash is fiddly and can be heavy, but it is working and I am hitting my goals every month, as now I am only able to spend what is physically allocated to me, and I don't let myself spend out of our current account.
Why bother clunking around with coins and fumbling at the counter?
The peace of mind I achieve at the end of each month is sooo worth this.
So you don't get caught out at the counter fumbling with your cash envelopes, just some cash out into your hand, before you go into the particular shop you are using the cash envelope with. It ensures you are calmer, and less likely to drop the cash, especially if you are not used to handling it as much as you do when you have cash envelopes.
In the UK, we have more coins, so I use a clip on the end of my envelopes. Also, 110gsm paper is thicker, and my cash envelopes are more robust, and hold coins more effectively then.
Are there any other reasons you like cash envelopes so much?
It makes me maybe wander round the shop once more, and work out if I can spend what I plan to spend, or whether I can get through the month if I empty my cash envelopes too early.
They are colourful pretty little controls for me. Haha - have a cash envelope make me accountable to myself. Like.. ok, so if I buy that coffee today, can I sit and blog in a cafe at the end of the month? Or if we go out for that meal, will be afford to get through the rest of the month without any other treats?
It's like I have an internal conversation that my debit card or credit card never inspired. This internal talk for me, leads me to keep within my budget. It's like I'm bargaining and planning at the same time with myself. Cash from my debit card or credit card used to fly out without any pain, until the end of the month, when I would frequently end up in overdraft unnecessarily.
Elly I'm worried about getting mugged with cash envelopes on me. It's a real concern. What would you suggest?
This question comes up a lot. Yes I hear you - I felt a bit exposed having cash in my handbag for the first time in years.
I tend to use a spare cash envelope if it is say a grocery shopping trip. So my main grocery cash envelope stays at home, and I might for example, take out £50 to cover my shopping. When I get home, I put the cash back into my main grocery cash envelope. That way I carry less cash.
The other way I think about it, is that statistically you are at the same amount of risk of someone stealing your bag and accessing all your data on your phone, or using your contactless debit card. Every day, I don't tend to worry about any of this, so I made the decision to stop worrying about having cash stolen.I have purchased a filofax mini binder, that I am going to use to carry whatever cash envelopes I am using, to minimise the risk of them falling out of my bag.
What if my spouse goes shopping or buys something once in a while?
You can organise this in a number of ways.
Not keen on cash envelopes...
Mr Budget is not so keen on using cash envelopes, so I just keep a note of his spending and pay in the difference that should have come out of the cash envelopes, with whatever is left at the end of the month. This means I have to leave quite a bit more spare money in the envelope than I think he will spend.
Wants to use cash envelopes...
If your spouse is really keen to use the envelopes, why not keep them at home, and if you guys know your spouse is due to do the grocery shop, they can take the envelope from where you keep them.
If your spouse say for example, tends to spend approximately £50 a month, and the whole budget is £250, make a cash envelope for you with £200 and a cash envelope for him for £50. Just keep adjusting the amounts until you have got the approximate spending spot on. It could take two or three months to get right.
For our fixed household expenses, I keep this money in our current account. When I am setting my budget, I put all these onto my budget sheet, so I know how much money will go out on direct debit.
Steps to success with using cash envelopes as a budget method.
- Make a budget.
- Record your spending
- Make categories for your spending.
- Set mini budgets for each category.
- Decide when to take cash out.
- Pay your regular bills and fixed expenses online or by direct debit.
- Take cash out and fill your envelopes.
- Only use cash in each envelope for that specific category.
When people say to me, Elly it just didn’t work for me, it’s usually because they rushed through the steps and either missed one, or didn’t take the time to complete one step to learn how it links to the other steps in the process.
This is a journey, that as time goes on, you will learn loads from, so give it a chance and give it time. Stick to your budget and you will soon be smashing your financial goals!