Cash Envelope Budgeting: Why Your Bank Hates It

Envelope Budgeting


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In a recent article by the New York Times they estimate that Banks will make over $27 Billion dollars off of consumers overdrafts from checks and debit cards. Let’s just say that you are expecting a $400 check to be deposited on Friday, it’s Friday so you go out to lunch with your coworkers $13.65, Saturday you take the family out for breakfast $39.28 and Sunday you hit the grocery store to get ready for the week to the tune of $89.72.  Monday morning you login to your banks website to see what’s what and realize that your deposit didn’t clear and you now owe $81 in overdraft protection fees that your friendly neighborhood bank won’t refund.  So what’s the answer? Envelope Budgeting with cash.

Envelope Budgeting?

Cash and envelopes are tangible and finite.  At any given time you know with absolute certainty how much money you have on hand and what it’s for.  On average you will simply spend less on purchases when you pay for them with cash then you would with credit or even debit cards.  When you have to hand over your cold hard cash it really makes you think about the expense.  Think about it, say you’ve got $200 in your clothing envelope and you happen to find a shiny new Gore-Tex jacket that you just have to have for $179.  A great deal right?  But think how sad those lonely 21 dollars will feel when 179 of their brothers and sisters leave.  Suddenly that envelope starts to feel empty and maybe you don’t really need a new jacket after all.

Cash Envelope Budgeting Basics

Pulling out cash for each pay period and separating it into various spending categories is definitely not a new concept.  In fact your grandparents or their parents might have used the same system.

Step 1: decide what spending categories you are going to use for each envelope and write them down or track them in your personal finance software.

Step 2: decide the dollar amounts for each category.

Step 3: go to your bank and withdraw the appropriate money to fill your envelopes.  It might be a good idea to do a little simple math and figure out what size bills and how many of each denomination you’d like.

Step 4: put the cash in your envelopes whether those would be some extras you got from the bank or some more formal type of envelope system (see links below).

Step 5: now whenever you go to make a purchase pay for it using only cash from that particular category.  When you have no more cash in that category you stop buying stuff.

Step 6: (optional) you can track your individual purchases, but since you’ve already predetermined your budget there isn’t a driving need unless you want to be more specific about tracking your spending.

I don’t necessarily advocate using cash envelopes for everything, as it makes sense to automate some of your finances for bills and more finite items that can be drawn directly from your bank.  Some possible cash envelope categories: Groceries, Dining Out, Gasoline, Spending Money, Entertainment, Clothing, Vacation and Gifts.

Cashless Options for Envelope Budgeting

If you are dead set against carrying around large quantities of cash then you certainly can try some different methods using a similar methodology.  I wrote an article for Wisebread on Using Prepaid Gift Cards as a Cash substitute that might be right up your alley.

My Own Experience

My wife and I have used cash envelopes since January 2009 with tremendous success.  We have always had a hard time maintaining a budget because we couldn’t agree on a system so we just spent away with our debit cards until the end of the month and would find that we spent several hundred dollars on eating out or some other non essential item.  My wife really likes it because she always knows where we stand and doesn’t feel like she needs permission or has to check with me to see how much money is left in our common categories.  That way we can be sure we aren’t overspending.  August of 09 we fell off the wagon so to speak and I didn’t get to the bank in time to pull out our money so we just free-formed it and as predicted we overspent in several categories.  It really cemented for us that this is a system that is terribly simple and works.

Envelope Systems

It’s kind of hard to find any sort of nice envelope system any more.  Here’s one available at Amazon Deluxe Executive Envelope System that is the same as the system my wife and I use. You can always make your own or ask for several extra envelopes from your bank when you pull out your cash. Have you had any success yourself? We’d love to hear about it.

Using Cash Envelopes with Budgeting Software

Depending on how you setup your budgeting software it’s very straightforward to integrate envelope budgeting with your automated expense tracking. I use You Need a Budget which works exceptionally well with our envelope system. When I pull out my cash for the pay period I right down the various categories and how much for each. In YNAB I just go in and enter a transaction with the total amount withdrawn and then for the category I choose split. It then lets me allocate a certain amount for each separate category like entertainment, spending, groceries and the like. It works great.

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