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
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I’m switching to the cash only approach and have found some success with getting small bills from the teller at the bank and setting them aside like you covered above. It really is more uncomfortable parting with cash vs a credit or even debit card. My motivation for the change was finally getting tired of the entire banking system with them holding checks for an unusually long time, not crediting direct deposits on time, ATM fees, and probable many others I am unaware of.
It is true, there is something about parting with cash that makes it more difficult to spend. Maybe because you actually see it in your wallet disappearing.
For me, it’s easy to swipe a card and forget about the transaction until the bill comes, especially with dining out.
Jason @ Redeeming Riches´s last blog ..Slaying This Monster Will Help You Get Ahead
The idea is brilliant – I may give it a shot myself. Lately, I’ve been feeling estranged by the postmodern electronic world and feel that a move back towards tangible systems may do the world some good. You can budget you want automatically, but sometimes if a budget is built automatically, it’s easier to ignore. Having actual envelopes and handwritten missives help to ingrain the realness of it all.
Jack @ Master Your Card´s last blog ..The Lenders Strikeback Pt. 2: More Credit CARD Act Loopholes
Great way to think about this. Never really hits you but it’s true. Same thing goes for CC companies who want you to pay the minimum to gain interest fees and hate those who pay in full. Need to be careful not to overdraft.
I don’t use the cash system -my partner and I have separate bank accounts and are very disciplined with our expenses. However, in order to avoid the situation you describe in the beginning of the post and end up paying overdraft fees I always keep a buffer in my account of at least $500. This way I know that even if a deposit doesn’t clear I won’t owe fees to the bank. I hate paying this type of fees and try to avoid them at all costs.
Kelly @ On the Road to $1M´s last blog ..Book Review: Secrets of Millionaire Moms
I think it’s interesting that a lot of people are moving towards a cash only approach. Some money experts are agreeing, as there has been many rises in debit card fees.
It’s an interesting idea, especially if you are having problems with overdraft and other bank fees. I personally use my debit card because I don’t like carrying a lot of cash on me. I can see where the system may help me spend less though.
http://www.newsy.com/videos/debit_card_woes
This system seems to be working quite well for a lot of people, probably because it is simple and can be followed easily. It also visualized better how actual money is spent. When you use credit cards, you don’t ever have that same feeling you get when spending cash, i.e. when giving up your hard earned money.
ctreit´s last blog ..Just “do it”? Not if “paying the piper” means paying out more than we have.
Using the cash envelope system has been saving me a lot of money.
As an envelope system I use a gallon ziploc bag with three paper envelopes (food, gas, and entertainment), plus a change envelope (I don’t keep change inside the cash envelopes) inside and my id and bank card.
It’s so dorky to pull out that the system itself restrains my spending before I even get to the envelopes.
I do EXACTLY the same as Steve in W MA. I put cash in five envelopes which I keep in a gallon ziploc bag. One each for: Transportation(gas/commuting costs), Bills, Groceries, Vacation and one for money I send to my Mom. (No coin envelopes.) At the end of each month I’m sure I’m on-track for each expense and then deposit it into checking. Using this method I’m sure I don’t borrow from one category to pay another and keep on-track. I also keep a $250 “cash-cushion in my checking account so I never overdraft. And I’m finally close to paying-off two charge cards. It’s the only system that works for me and I got the envelopes free from my bank.
Way to go Tom. We’ve recently paid all of our non house debt off and it’s the same method we are using now, it just is so simple and it works.