A Quick Guide to Using the Cash Envelope System

Jan
21
2013

envelope-systemI have used the cash envelope system for 16 months now, and I will never go back!

The cash envelope system is a great way to get a hold of your finances. It gives you control over your money and allows you to tell your money where to go. In 16 months, I have paid off $42,000 in debt using this system (I am not kidding).

Studies have shown that when we spend cold hard cash on an item, pain centers go off in our brain; it is hard for us to let go of our money! These same pain centers do NOT go off when we swipe a piece of plastic. By creating a cash and envelope system, we literally see that money is FINITE; there is an end to it if we are disciplined about not borrowing more.

By using cash only in envelopes, I have slowly changed my behavior and attitudes towards money.  In addition to paying my debt mentioned above, I have come to the clear realization that money is FINITE.  Without the aid of credit, we have a limited amount of funds, and we need to be extremely aware of this fact.

Here’s how you carry out my system:

Start with your budget

The cash system is linked directly to the budget that you will be creating; some of your budget lines will be automated (mortgage, rent, insurance, etc.) and some will be “cash lines”. These budget lines, like food, gas, eating out, coffee, etc., are the categories where you can really start being frugal and responsible with. They are also ones that we traditionally don’t know how much money we spend on!  I will say that I have turned my finances completely around after being aware of (and controlling) my “eating out” budget line.

Label each envelope with a category 

Your envelope system can be homemade or a little more fancy, it is up to you. Basically, you want to be able to label each envelope and be able to carry it around with you in lieu of a wallet. There are not too many systems on the market, so shop around accordingly.  I bought Dave Ramsey’s envelope system, which has worked very well. Write down the name of each category on each envelope. For the first two months, I wrote the amounts of each transaction on the envelopes as well.  By the third month I got the hang of things, and I was aware of how much money I habitually spent on each category.

Fill your envelopes

Your budget should dictate how much cash you put in each envelope. Getting the money right for each category will take a couple of months of trial and error.  Then do the same for the different envelops you have created.

Stick to your budget!

When you run out of cash in an envelope, it is gone! You cannot go to an ATM and fill it back up. No cash in the “eating out” envelope? Guess you are making lunch and brown bagging it!  It has been so incredible to watch my bank account stay the same each month since I do not use debit. On any given day I can tell you what my balance is. My wife and I have a budget meeting at the end of every month to go over our finances together.

Have a goal in mind

When you are using the envelope system, it can be extremely helpful to have a goal that you are trying to meet. When we started using it, we wanted to pay off a specific amount in debt. Any extra cash that we had left over at the end of the month went toward our goal: paying off debt. Keeping specific goals in mind helps us keep up motivation to stay within our budget.

My budget has been overhauled after using the cash envelope system. My family has easily saved $400-$700 a month on stuff like food, wine and gas and we do not feel like we have sacrificed anything.  I will use the system forever!

Comments

  1. I suppose the best part is that the money is waiting to be used and you won’t feel guilty about it because the money is budgeted. You know you have to watch how you spend it because when it’s gone, it’s gone. I like your enthusiasm…. I will use the system forever.

    • CBB: It’s true..I could be a millionaire and still use this system. It is the only thing that has ever worked for me; actually “seeing” that money is going away…

  2. This is the budgeting technique that I use! I have several envelopes labeled for different categories like food, internet, utilities and so on. It’s quite effective for me because once I don’t have any money inside the envelope then it means I have to wait for the next payday to buy something.

  3. We use the envelope system and it works great! Well, it works great when we remember to use the cash in the envelopes instead of the debit card. We have been getting better at it though :)

  4. Still figuring this out (just in my first month), but one of the most impactful things you told me is to allow myself about 3 months to hone it. As a coach, I am well acquainted with my “saboteurs” who generally tell me that if I don’t do it perfectly the first time it’s a useless system and I should toss it and go back to my old ways (works for eating habits, exercise, you name it…). Hearing your voice say, “you’ll screw it up the first three months, but each month you’ll get better at it” has completely over-ridden those other voices who try to do me in whenever I try to make meaningful (and big) changes in my life. Thank you, cuz. As always.

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