Can you imagine what it would feel like to have a handle on your finances? To never have a another stressful conversation with your spouse about finances? Or to have a sense of financial freedom? Did I just say financial freedom? YES, yes, I did.
I never knew that could be a possibility until I discovered the Cash Envelope System.
Starting a Cash Envelope System was our golden ticket into the world of financial freedom, but we couldn’t just start it we had to stick to it in order to see results. This has been the ONLY way to keep us on budget every single month.
What is a Cash Envelope System?
A cash envelope system is a way to divide your spending into categories. More on that later. Each category has its own envelope to keep spending separate and organized. All spending must be done with cash.
The benefit of this system is that once you have spent the cash in a category you have no other options for spending that month. You can not move money around into other envelopes. As a result you stay on budget every single month.
Before You Start
Before we can dive into making your cash envelope system you must have your budget ready. Does the word BUDGET frighten you too? We also have you covered on how to start a budget.
How to Start Your Cash Envelope System
1. Half Cash | Half Digital
With today’s auto paying online sometimes doing ALL cash doesn’t make sense. What is important though is that you make a system that works for your family.
After you have set up your budget the first thing you need to decide is what categories you will be paying cash with and and which ones you will be paying with a debit card. Do not use a credit card to receive those extra points and goodies until all debt has been paid off. Accruing interest on credit cards will set you back in the long run. Once you have mastered self-discipline you can start to incorporate credit cards back into your methods of payment.
We pay our monthly bills online (mortgage, utilities, cell phone, internet, insurance, Netflix, gym membership, etc) and the rest is all paid in cash. Items paid with cash are anything we have to walk into a store to buy. With the exception of gas for our cars. We set a limit each month for each vehicle. We put a notebook in each vehicle to track how much we spend on gas and what date so we never go over the allotted monthly amount.
Now decide what categories your family can pay with cash. Make a list of the categories and exactly how much cash is going to go into those categories each month. The more categories you can pay with cash the easier it will be to stay on budget.
Add up each category to get the total amount of cash you will need to withdraw from your bank account each month.
2. Let’s Organize
Because you are working with cash you will want to get yourself organized so you don’t lose it. Let’s think about how you're going to store and handle your cash. I suggest getting some type of container to keep the envelopes and cash in.
You will need an envelope for each category you will be paying cash with. You will keep the cash in the envelopes inside the container.
I use a recipe card holder for my envelopes and cash. There are many different ways to store it. Pinterest has tons of ideas for this, check out mine here.
The big key factor about the cash envelope system is your are living on last month’s income. That’s right no more living paycheck to paycheck!
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3. Get Ahead of Your Bills
Being a head one month or more on bills can make your cash envelope system much simpler. It might take a little self-discipline to get ahead but it will be worth it. Setting cash aside every paycheck will become easy once you are a month or more ahead of your bills.
There are many ways you can get ahead of your bills, but one of my personal favorites is doing a No Spending Month. Yup, it means exactly what it is. You cut out all the unnecessary spending for a whole month.
Rules of a No Spend Month
1. Pay your bills!
2. Cut all Unnecessary Spending
3. Set a very small budget for fresh groceries. Keeping your family healthy is most important, set aside money for milk, eggs, fresh fruits and vegetables. Suggested amount would be $20 a week. For a total of $80 for a month.
4. Start Now! Don’t wait or else you will never do it.
The key to being successful with a Cash Envelope System is by pulling your cash out on payday. Not a day later or a week later, on payday. Just one swipe of the debit card can throw off your entire cash envelope system. So make sure every time you get paid you pull out your cash for your envelopes.
How often you get paid will determine how much you pull out. If you get paid once a month you will pull out your entire monthly cash amount on each payday. If you get paid twice a month you will divide your monthly cash total by two. This number will be how much money you need to take out of your bank account each payday.
Once you get your cash on payday as soon as you get home distribute the cash into each envelope. This money is what you will be allowed to spend in that category for the pay-period.
We keep our money at home in our box with envelopes until I need to go to the store, that way there is no cash hanging out in my wallet for me to spend or lose.
Examples of Cash Categories
2. Household Miscellaneous
4. Fun | Entertainment
5. Spending Your Cash
Now you are set to start using your cash and stay on budget for the month. Remember, once the cash in your envelope is gone, there is no more spending in that category for the month.
Using the Cash Envelope System will help keep you and your family aware of the cost around you. And overtime you will see your spending habits change.
I believe in you and know you have what it takes to stick to a Cash Envelope System. Find people around you that you trust, and tell them what you are doing to help keep you accountable. Ask your friends and family to join in with you.
If you have any questions comment below and I would be happy to help! Let’s get your finances on track together to start your path to financial freedom.