Our Cash Envelope System

When we started on the Baby Steps all those years ago, one thing we resisted was switching to cash only. Our debit cards were so convenient, so easy. How could we give that up? Plus, when I had cash in my wallet, it had a tendency to disappear - a Coke here, lunch out there, a new shirt there, another Coke.... how could that be a better way?

I've been reading more and more lately about envelope systems, and people seem to be quite confused about what it is, how it works, and that it does work. At least I hope they're confused, otherwise why make such dumb comments?

Well, we toughed it out on debit cards for quite a while, and though we were able to monitor our spending quite closely, it was still just too easy to bust the budget and overspend - even by a little. The biggest problem was that you didn't know what you had left unless you went and did all the math before hand - which no one does. Mostly you'd end up doing it after the fact, just to find that you'd inadvertently overspent. Eventually we knew we had to do something different.

While listening to Dave one day, he was discussing the envelope system and how they did it. Initially they were strictly cash. But as they got better about their spending, they limited the cash to just a few categories. That made a lot of sense to us, and since we were not doing that bad on spending, we took the half-plunge. We tried cash on just a few categories and found it worked quite well. We still used debit for gas, still payed utilities online, but things like eating out, clothing, and spending money were all cash. And what a difference that made.

Sometime later, when we thought we had our spending down to a science, we went back to plastic. I think it was more laziness than anything. If we could succeed without that extra step of drawing cash out each month, then why not? Well, we couldn't. Cash was just a better way, for certain categories. Before going over just how we do our envelopes, I'll give a quick framework for the envelope system:

  1. We are done with debt - we don't need it, and that includes credit cards.
  2. Debit cards, while not incurring debt, can still enable overspending, which is the root of the problem at hand.
  3. Sticking a wad of cash in your wallet does not constitute "switching to cash". That's like embarking on a cross-country trip with no map or directions. You are set up to fail, maybe not catastrophically, but you're not in a position to win. This is about behavior change - you can't go about your day the way you used to and get the same result.
  4. This can be done, even when there is more than one of you doing some of the spending, but it will take time to find the right formula for you.
So knowing all of that, here is the system that we have laid out and currently use.
  1. Budget - It all starts here. What are we spending this month and where? If we are traveling, then the restaurant category will be a bit higher, and groceries a bit lower. If you have your budgeting down, then envelopes should go smooth.
  2. Cash - What will we need cash for? For us, we do groceries, restaurants, home improvement, and clothing as well as baby sitter money, and petty cash as needed. We chose these as they are the easiest to overspend on, or ones that we just need cash for - the babysitter doesn't have a card swipe!
  3. Withdrawal - Once that paycheck hits, the Mrs. makes a withdrawal and sorts the cash into their envelopes. These days, she's using a small accordion file, that keeps it all neatly organized.
  4. Distribute - One she has the cash, I get my allotment. Since she does the grocery shopping, and most of the shopping in general, I don't carry much cash.... since I don't need much cash. I usually just have a bit of cash for a couple lunches out. I only carry what I'll need. Money we won't need that day stays at home.
  5. Spending - Cash envelopes are sometimes seen as being more difficult, but that is due to overlooking their simplicity. It's easy to know what you have left, in any category, at any time with no guesswork, no reconciling, no fancy software. Open the envelope and count. That is what you have left. When it's gone, it's gone. When you have extra, reward yourself.
It's really not tough, and only serves to increase discipline as opposed to plastic, which has nothing to do with discipline. But it's only as good as your budget, so make sure you get that working right. Sure we still use our debit cards for things like gas, hair cuts, vet bills, and on-line shopping. Those are places where we don't tend to overspend, and using cash would really have no benefit. Utility bills, medical bills, insurance premiums, and the mortgage are either paid online or with a check.

Last, the most absurd objection to using cash is that it's "a burden to carry cash" / "too dangerous and I could get mugged". Seriously? Some cheese with that whine? How on Earth is cash difficult? If having a plan, budgeting, and not shopping on a whim is a burden, then yes, guilty as charged. And dangerous? If you're going to get mugged, then you are going to get mugged - no matter what is in your wallet. Maybe worry more about not making yourself a target? Nobody said you have to carry all of the cash all of the time either. You know when you are going grocery shopping. Otherwise, don't take the grocery envelope. Now stop making excuses, and take control!

Have you ever tried cash envelopes? With or without a plan?

How are your envelopes set up?


Jill said...

My husband and I switched to all cash envelopes about a year and a half ago. We experienced what you did with debit cards - if there was $ in the account, we would spend it. We would never go back - the cash envelope system really works! However, I've found that people don't want to switch to cash. They really LOVE their debit cards.

We have envelopes for everything except our auto-debited bills. We even started accruing for major expenses in cash - like car maintenance, yearly vehicle taxes, vacation, etc. Cash makes the our budget more tangible. It helps us take responsibility for it.

I've been amazed at how well the system works. I can only speak to my personal experience. I've tried placing everything on a credit card (for airline miles), debit cards and now cash. Cash works the best for us.

(not) the Jet Set said...

Glad to hear that it is working so well! More people would like it if they would give it a chance.

The Happy Rock said...

Thanks for sharing your experience. I am often recommend the option, but can't give to much practical advice as I have never done it. Our spending is very much under control, although I often wonder if the envelope system would help us eek out more savings.

(not) the Jet Set said...

Happy Rock-

I would challenge you to try it for a few months. I think you'll find that you'll spend differently, as we did. I'minterested to hear your experience.

amyrrhielle_herthoughts said...

I don't really use an envelope system, but something like it.

Before my salary arrives, I write out a budget, and when I cash in my cheque, I pay my bills first and put some in the bank. I get some money for other expenses, and place it on my debit card.

It is true. You tend to overspend with your credit/debit card. Just because you can swipe it.

In fact, yesterday, I was already happy with my birthday purchases, when I saw 4 dvds that I've been wanting to buy for quite some time. I didn't have cash on me, but I had my credit card, and since I placed my money on my debit card, I said, I can swipe. Swipe I did. Now, I regret the purchase, although I'm enjoying the movies.

Next month, I'll see if I can go back to envelope system with our home expenses and bills.

(not) the Jet Set said...

amyrrhielle -

You are right - it is very easy to do impulsing or not. No amount of software or debit/credit card features will stop that. Thanks for sharing!

Anonymous said...

When I was single I used the cash in envelopes system, and it worked wonderfully. Before I was married I had no debt, and $27000 dollars in the bank. It's tough to convince my husband to use this system, so it's best to make sure you are on the same financial page before you say "I do".

bugbear said...

If you really want to stick to a budget like glue on a stick, use the cash envelope system.

Even if you don't for most of the year, I think a cash envelope system for Christmas holidays is a fantastic idea and will enable you to stay within your predetermined budget. So much Christmas shopping is emotion-driven that having a finite amount of cash in an envelope helps in grounding the shopping experience in reality.

As an aside, I see a much larger number of people paying in cash at my job (I work in a retail bookstore) this December/Christmas/Chanukkah season. And the number of people who are pulling that cash out of actual envelopes is probably 5 times what I have seen in previous years.

The cash spenders always seem more deliberate and secure in their purhasing to me. There is more weight and intentionality behind their spending from my perspective as someone who interacts with thousands and thousands of customres throughout the year.

Julie said...

Love using cash only... that is why I make these cash clutches...


No silly embarrassing envelopes anymore!

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