The Envelope Cash System – Mrs Breathe Easy Finance
When I was in college, I worked a part-time job to be semi-independent and support myself. I wanted to be able to afford groceries and other basic necessities, without having to constantly rely on my family. I worked in an office as a student secretary and got a small bi-weekly paycheck. I remember going to the bank, cashing my check and the bank teller would hand me an envelope. I would get back to my dorm room and quickly crunch the numbers. I separated the money and jotted down how I would stretch every cent for the next two weeks. My budget was extremely tight, but using this method, I always made it to the next paycheck. I never starved or called my parents at home for assistance. Little did I know at the time that I was implementing a form of the envelope system. I think we need to bring back the use of cash. This was alluded to in the post about saving more and living better during holiday seasons.
For those who are not aware of the envelope system,
What is envelope system definition?
Cash envelope system is a system in which budgeting is done using cash only method. It is a simple way to divide your spending into different categories with each category having its own distinct envelope. The different categories help keep the spending separated and organized. This system is famously associated with Dave Ramsey.
What is in your wallet? Cash envelope?
In the voice of Dave Ramsey, “What’s in your wallet? Cash.” We are putting way too much faith in those plastic rectangles in our wallets. I always say cash keeps me honest. The envelope system is a tried and true method, because you can physically see the cash and determine your spending. Cash in your hand , can be difficult to part with. I will literally walk around a with $20 dollars in my purse for weeks and be very selective on what I would spend it on. Yet, I will swipe my card to spend $20 dollars in a heartbeat.
Before going to the next section, check out our 12 toddler steps to financial freedom and Financial pyramid to put your financial life in order to get the basics.
How to implement the Envelope cash system
Here is how to get started: Sit down and budget out your monthly spending. Label an envelope for each expense and write the allotted amount on the envelope. You should have an envelope for bills, debt and monthly spending. To be precise, you should break monthly spending down into categories. Some examples of monthly spending are groceries, dining out, entertainment, clothing and gas. The key is to be exact as possible without becoming overwhelmed with envelopes. When you get paid, place the money in each envelope as budgeted. Give special detail to the area in which you struggle.
Be mindful of your lack of discipline in any particular area. If you always go over your budget with groceries, then that will be your area of focus. If there is $200 dollars in your grocery envelope that is all you spend on groceries. Therefore, if your bill is 205 dollars, you must return an item to the shelve. The envelope system only works, if you abide by the rules. You cannot go over budget or borrow from another envelope. The cash you have is all you can spend. You are not allowed to use a card for additional money.
What to do with the left over
What do you do with the left over money, if you ended the month with a surplus? Good job! The envelope system worked for you. Spending less than your anticipated budget is the ultimate goal of the envelope system. My first recommendation is to pay off any outstanding debt, if you have money left over. The envelope method is tailored to those in debt or who are simply having difficulty handling their monthly finances. If you are debt free, you can roll the money over into next month’s budget or use it to reward yourself.
What is “Blow Money”
Depending on your finances, some families have what is referred to, as blow money. Couple’s with a “blow money” envelope shouldn’t be financially strapped, but use it as a method, to be accountable for every cent. It’s a recreational envelope so to speak. I know a couple who both have a $150 budget each for their “blow money envelope”. The wife uses her money to fund her Starbucks habit and her husband buys random things throughout the month. I’m all for the “blow money” being a part of the envelope system, if you are debt free. If not, don’t spend money on Starbucks or random items, when that money can be used to make an extra payment towards paying debt.
Make the System Yours
There is no one size fits all when it comes to a monthly household budget. Make the envelope system work for you. Most of our bills are auto-pay. I prefer this method because I don’t have to remember payment schedules and therefore avoid late fees. If you struggle with making your payments on time due to forgetting or being unorganized, you might want to try auto-pay. Making late payments does not only disrupt monthly budgeting, but it’s the kiss of death for your credit score as well. We don’t realize that in terms of credit, it’s not good enough to make the payments. Your payments need to always be on time. Since, auto-pay works best for me; I’ve eliminated the bills envelope. All our bills are paid electronically and we never touch that money. We also don’t interfere with money for savings/investments; they automatically go in the appropriate accounts.
Stick with it! It takes time and discipline. If you want to get out of debt or have a better grasp on your spending, the envelope method is for you. The process of counting money and managing envelopes can be intimidating, in comparison to swiping your plastic and moving on.
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