When I tell people I pay for everything (okay, not everything) in cash, they look at me like I’m speaking a different language. In the age of credit cards, using cash seems like an ancient form of payment. I’ve learned that using cash makes my life easier and helps keep me on budget.
Why should you pay in cash? You will know where you’re money is going and how much you have to spend each month, just look in the envelope. Plus it’s a lot harder to hand over a wad of cash than it is to swipe plastic.
How to start a Cash Budget System:
1. Set a budget and plan your expenses at the beginning of each month.
2. Establish categories for cash payments within your budget. Your fixed expenses such as mortgage, car loans & utilities can be paid online each month. Your variable expenses such as groceries, entertainment, household expenses, etc. would be ideal for your cash budget. If you’re like me, having multiple categories works best. I have 12 cash categories. You might not function well on such a strict budget, so you might want to divide your cash into food, clothing and entertainment. Do what works best for you!
3. Make an envelope based on each of the cash categories you establish. Label each envelope and determine how you want to carry your cash. I have a simple pocket file from a local office supply store. You can also purchase a Deluxe envelope system that is a bit prettier than mine. My economical system involves plain security envelopes with a printable label fixed to each so I can record my spending*.
4. Withdraw cash from the bank each pay period and divide it into your envelopes. If you spend $400 per month on groceries and get paid twice per month, you can either add the entire $400 at the beginning of the month or add $200 twice per month. Your other monthly bills & personal spending habits will dictate how you allot for your cash budget.
5. When it’s gone, it’s gone. Once you spend all the money in an envelope, you don’t get to add more until the next pay period. No trips to the ATM, no purchases on the credit card.
6. Evaluate your cash monthly. Just like managing your budget, you need to manage your cash. If you’re always out of cash before you get paid, you need evaluate your spending habits and if you’re being realistic with your budget.
7. Give it time. You’re not going to adjust to a cash budget overnight. It will take a few months for you to learn to manage your cash. You’ll also need time to build up cash in your envelopes. I roll my extra cash each month (except my grocery). I may not need to buy the kids clothes every month, so the cash is available if I happen to run into a great sale or want to buy tickets to a baseball game.
*When I first started my cash budget, I recorded every transaction I made on the envelope. I was able to determine where exactly my money was going & find ways to cut my spending. After about a year I stopped recording transactions on my envelopes; however, I have friends that continue to write it all down.
Make sure to check out Dave Ramsey for more information on the Envelope System
Do you use a cash system?