Thanks to Nichole for sharing her insights today while I'm recovering and spending time with the newest member of the Six Figures Under family. I'll share more baby details later this week!
Before my path to debt freedom, I was the Queen of Credit Cards and cash back rewards were my best friend. Fortunately, I never experienced credit card debt. However, I was and still am not anywhere near the Credit Card Master Minds as Stephanie and Mr. SixFiguresUnder.
In fact, my husband and I cut up all of our credit cards three years ago. Yes, you read that correctly. We do not have a single credit card in our name. We travel all around the world. We are Americans living in England. We not only survive but thrive without a single credit card. Crazy, right?
Are you wondering what happened to us three years ago? Well, a few months after our wedding day. We woke up from our honeymoon bliss to $170,000 of DEBT!!! We definitely worked too hard and made too good of money to be in this financial mess.
That same week, we came across one of our wedding gifts. Dave Ramsey’s book, The Total Money Makeover.
If you are unfamiliar with Dave Ramsey’s approach to personal finance. He encourages the use of cash envelopes. Being the former Credit Card Queen, I most definitely rolled my eyes at this approach, but went along with it for the sake of my marriage.
A funny thing happened when we started using cash instead of our cards. We spent less money. Significantly LESS! We are talking about hundreds of dollars each month! Thousands each year!
After three years of using cash envelopes. I would NOT go back to using credit cards. EVER! Okay… maybe if someone paid me a lot of money. But definitely not for the measly 1-5% cash back reward most credit cards offer.
How to Implement a Cash Envelope System
- Every new month you Establish a Budget. You can use any budgeting tool you desire (YNAB, Mint, Spreadsheet, Pen & Piece of Paper).
- Decide which Categories will be Cash instead of using your debit/credit card.
- Categories with discretionary spending (grocery, entertainment, restaurants, clothing, etc.) are great places to start.
- Areas where you tend to go over budget, would also be a great place to implement using cash.
- At the beginning of each month, get the budgeted amount of Cash from the ATM.
- Place the correct amount of Cash in the each Designated Envelope.
- Before going to the store, simply Take the Cash you need for that shopping trip.
Any time throughout the month you can check your budget, by simply peeking at how much cash you have left. Once your cash is gone in an envelope. You are done spending in that category for the month.
Cash Budget Categories
Our cash budgets include: Groceries, Restaurants, Entertainment, Blow Money/Fun Money for each of us, Husband’s Work Expenses, and a Miscellaneous fund that covers unplanned small expenses, like an invitation to a last-minute potluck.
Non-Cash Budget Categories
We choose out of convenience to have our monthly bills on automated payments. We pay for gasoline with our debit cards to save time. We use debit cards while vacationing for our safety because we do not want to carry large amounts of cash in unfamiliar places. Everything else is paid for in cash.
Benefits of Using Cash Envelopes
- Spend Less Money
We are a lot less likely to purchase any “extras” because we only have a set amount of cash. Those cookies do not make it into our grocery cart. At restaurants, we are conscious of our entree selection if we really want dessert. We certainly do not want to be embarrassed at the cash register by not having enough cash. - Simplest Budgeting System
We have found in our years of budgeting that the simpler, the better. The cash system does not require you to keep a running total of your expenses in each category. You do not need to use a fancy budgeting app or program. The more simple our budget. The more likely we stick with it and not make mistakes. - Impossible to go Over Budget
Using cash guarantees that you will stay within your budget. Once the cash is gone, it is GONE! - Controls the Mindless Spending
The cheap $1 toy your child wanted at the Dollar Store. The $3 coffee. The $2 parking. The $.75 candy bar and $1.50 soda. The adorable $5 clearance item you could not say “no” to. We do not think twice about these small purchases, but they add up to A LOT over a month. I encourage each adult or each family member to use a “fun money” cash envelope for these small, random, non-essential purchases. You will be surprised how quickly this fund dwindles down or how many times you have to tell yourself “no.”
How about you?
- Which budget categories do you use cash envelopes for in your family?
- Have you implemented cash envelopes and found similar or different results?
- Which budget category is consistently over budget? Would a cash envelope work?
Nichole is is the Budget Loving Military Wife who writes about her Journey from Debt to Wealth. She is a frugal living, personal finance nut who loves a good deal. Her husband’s military career has her living in England, traveling Europe, and experimenting in the kitchen to discover copycat recipes from her favorite American restaurants.
Linked to One Project at a Time, Thrifty Thursday
Awesome to see people using the cash envelope system. We are a new startup that has finally made it possible to do ALL of your budgeting in a cash-envelope style, but on a debit card. With our app, you literally spend from your envelopes, just like the cash system, but you do it all with a debit card and an app. We’d love to have you be a beta tester for us if you’re interested? Check it out here: http://envudu.com. Shoot me an email if you’d like to know more. 🙂
I love the envelope system. We have paid off so much more after switching to it. Our categories are baby, kids, booze, home and car maintenance, groceries, his blow money, her blow money, restaurants and babysitter.
We have been doing it for 2 years now. I will never go back. I even started making and selling my own pretty envelope sets. Check them out at Etsy.
https://www.etsy.com/shop/CraftySundays?ref=hdr_shop_menu
I don’t like carrying cash but I do like the envelope system, so I use Goodbudget. It’s a virtual envelope system that has worked well for me. I have the app on my phone so I can check envelope balances and enter expenses on the go. I also love that once I put money into a designated envelope it stays there! I don’t accidentally dip into needed money like I did when I just based spending on my bank balance. I’m not working off of last month’s income yet (soon!), so I enter budget my income each payday before I roll out of bed. I can’t recommend budgeting highly enough.
I love using an envelope system for saving towards future expenses, like new school year, vacation and so on. It really helps us stay on budget and that money doesn’t get spent until it needs to be.
Congratulations on the baby!
We use a cash envelope system for food, household items, eating out, and fun money. We do leave an extra $600 in our checking account so that getting gas and unexpected items is convenient with a card and that way we can track those expenses that seem to change from month to month a little more easily. I like it this way because after we take cash out and move money to another account strictly for bills I know exactly how much money i have left. I used to get so disappointed when my bank account would keep going down and down and down as we spent money. Now I try really hard to keep as much of that extra $600 in there so that we can add even more to savings at the end of the month!
What a great surprise to read your post Nicole! But you didn’t tell everyone about the $1 Million Challenge 🙂
Congrats Stephanie!
Thank you Libby! You are right, I should have somehow included it in this post! 😉 But you did my job for me, by announcing it! If anyone is wondering what Libby is referring to, you can see our March Update: The $1,000,000 Challenge
My husband loves the cash method. I … do not. I´m no good at keeping track of receipts and recording purchases. When I have cash, I use it for something and it´s gone forever. No clue where it went! 😛 Though I gave up credit cards cold turkey back in August, I use my debit card for everything. I have to have record of what I spent my money on. I like being able to login online, see my purchases, and update my budget. My husband on the other hand, he keeps his grocery budget and his allowance all in cash and is very meticulous about his record keeping. We each do what´s best for us!
That’s great Chela that both you and your husband have found what works best for you!
We are similar to you and don’t do well with keeping receipts. However, that’s where we find the beauty with using cash. As long as we are removing cash from the correct envelope, we know it was spent how it was budgeted. So there is no need to keep track! Once our money is gone, it’s gone! If we run out of money, we have make due with what already have on hand, until the next month. 🙂
Congratulations! I commented to my husband the other day that you must have had your baby ’cause there haven’t been new posts the last few days. I’m so happy for you!
Congrats on the littlest one! Thanks for such a great guest post while you are recovering. We’ve been experimenting with using a cash envelope system, as well. I always like to challenge myself to see how much I can have left at the end of the week. We either roll it over into next week, or we’ll put it toward an item we are saving up for. We were able to pay for an anniversary weekend away by using our leftover envelope money!
Sarah, I like the idea of using the left over to use for a “fun” purchase or anniversary weekend in your case! 🙂 Definitely reinforces staying under budget!
We currently roll our extra into paying off our debt, but I think once our debt is gone I am definitely stealing your idea! Thank you! 🙂
Congratulations Stephanie, I can’t wait to “meet” your little one!
Regarding paying cash for certain budget items: my husband and I tried this for several months a while ago and found that it didn’t really make as huge a difference as we thought it would, because we still had our debit cards with us and would pull them out to cover any cash shortage! I’m sure it would would work much better if you leave the cards at home (and maybe just carry paper checks for an emergency).
The main reason we stopped though, is that I kept losing cash trying to keep track of a bunch of kids, groceries and change at the store. I’m not normally a scattered person, so it was extremely frustrating for me (especially after the second or third time!)
Using cash envelopes is definitely a challenge. We also struggled with keeping our cash in the correct envelopes and not “losing” it. We now leave our cash envelopes at home and only take the money we will need for that particular grocery trip or day out. This seems to work for us.
As far as using debit cards. It may be helpful to make “rules” about when and where you can use your debit card. For example, we use ours for gasoline purchases and with other large planned purchases. We keep ours in our wallet, but maybe removing it for a couple months while you are establishing your new habit would be helpful. Thanks so much for the comment Sarah!