Cash envelopes are an extremely powerful tool in money management. Done correctly, they can stop overspending IMMEDIATELY.
Benefits of Using Cash Envelopes
- Expectations between spouses regarding spending are super-clear.
- If you spend on a specific category only from its envelope, overspending will stop immediately.
- You know exactly what you can and can’t afford when you really need to know it.
- You’ll have a sense of peace and of being in control because you ARE in control.
Which Budget Categories Should Have Cash Envelopes?
We recommend cash envelopes for any budget item where:
- you’ll be making buying decisions in the moment
- it’s easy to overspend in that category
The most common cash envelope categories are:
- groceries
- eating out
- personal spending
Less common cash envelope categories include things like gasoline, clothing and hair/nail care. We don’t use cash envelopes for these items. Instead we use an itemized savings account—virtual cash envelopes—to keep spending in these categories under control. We’ll look at itemized savings later this week.
Get Set Up
- Choose which categories will have cash envelopes.
- Write the category names on the envelopes. You can make more than one envelope for a category. Groceries can be divided into 4 envelopes, one for each week, to even out spending through the month and to limit the amount of cash you carry with you.
- Look over your budget and add up how much cash you’ll need for all the envelopes for the whole month.
Fill ‘Em Up!
WARNING: Paying for stuff in a cash envelope category before you’ve gotten cash for the month often leads to inadvertent overspending.
- At the very beginning of the month, go to the bank or ATM and withdraw all the cash you’ll need for that month. Getting it all at once ensures you’ll have the money you need so you don’t end up using a debit card because you didn’t get around to going back to the bank again later.
- Break down the cash into different denominations when necessary. (We choose to have these budget items in $20 increments so we can use an ATM and skip this step.)
- Go put the cash in their respective envelopes immediately. DO NOT PASS GO. Don’t stop by the store and the gas station and get the cash all mixed up. Take care of this step right away.
- Put any envelopes you won’t be needing right away, such as the other 3 weeks of grocery money, in a lock box in your home.
- Keep the envelopes you’ll be using regularly with you.
Caveat
Remember, you chose the amount of cash for each envelope on purpose. So don’t just grab money from one envelope to use for another category, e.g. using grocery money for a run to Starbuck’s coffee. Moving money between envelopes can skew your understanding of where your money is going. If you consistently find that there is not enough money in one category or too much money in another one, consider revising your budget to reflect what you really need.
