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The Cash Envelope System – The Benefits of Using Cash

Using cash rather than your debt card or checkbook can save you money if you do it correctly. It can also keep you from acquiring overdraft fees. Recently my husband and I made a banking mistake because we didn’t use the cash system. If we had been using the cash envelope system like we had been doing in previous months this mistake could have been prevented.

The banking mistake we made cost us $136 ($34 was removed after I called a begged for a break) in overdraft fees. The six transactions made were all things that could have been allocated to the cash envelope. I vowed for this type of mistake never to happen again the last time it happen so I really upset about it. The last thing we needed was to fork over $106 to overdraft fees. So once again we need to refocus and reevaluate our priorities.

Keeping track of our finances properly needs to be a priority. The cash envelope system works very well when we actually use it. The cash envelope system is easy and but it does require self discipline. Dave Ramsey offers a very cool cash flow wallet with some of the package deals but if you don’t want or can’t afford to buy a wallet then you can make your own system.

How to Use the Cash Envelope System

Supplies Needed

  1. Large Envelopes (No. 10 or larger), One for each category. You also might want to get one large manila envelope to keep all your cash envelopes in.
  2. Pencil and Pen
  3. Cash

The first thing you are going to need to do is decide what you are going to pay cash for. Dave Ramsey recommends using cash for the following categories;

  • Food (all food purchases, including fast food)
  • gasoline and oil
  • car repairs
  • clothing
  • cleaning/laundry
  • baby-sitter
  • toiletries
  • cosmetics
  • hair care
  • entertainment
  • blow money (money you know you are going to spend that doesn’t have a designated category).

Some of these items can be combined with other categories. For example, cosmetics and hair care can be combined. You can probably get away with using 6 envelopes but if you need more that’s fine too.

The basic idea of the envelope system is very simple. You deposit and withdraw money into your envelope just as you would into your bank account. You must keep track of the cash flow otherwise the envelope system will not work properly. The ledger can look something like what I have below. The cash envelope system offered by Dave Ramsey uses the same format.

Date            Where                                 $<>                                 Balance

1/20              Paycheck                          $100                                $100

1/21                Grocery                           <25 >                              $75

1/22                Fast Food                         <10>                              $65
In order for the envelope system to work you need to be using a budget that determines how much money goes into each category. The allocated spending sheet offered by Dave Ramsey is a very good way to keep track of weekly spending. Not everyone gets paid the same way so the allocated spending sheet allows you to customize your budgeting. For example, if you got paid once a month you could allocate monies to different categories at the start of the pay period. If your paychecks come in weekly or bi-weekly you may need to split your monthly budgeted money for each category differently for each week.

Let say I have budgeted $400 for the month for the “Food” category, but our paychecks come in weekly. I would use the allocated spending sheet to determine how much of our weekly paycheck will go to the food category. I might choose to allocate $100 each week or maybe $100 in week one, $125 in week two, $75 in week 3, and $100 in week four. The reason I might choose to do the latter is because one week a large bill (like the rent or mortgage payment) might be due the week that I have opted to spend $75 on food. Each category will need this kind of attention for the envelope system to work best.

What happens to many people who try a budget and fail is the failure to properly manage the budget. It does take some work but once you have the first three months budgeted it does get a lot easier. I highly recommend using the allocated spending sheet, especially if you are just getting started with a budget. The spending sheet helps you to break down your spending into manageable portions.

If you are like I was when I first started using a budget, the thought of using more than one form is overwhelming but what I found is that the second form really helped me keep on track.

January 25, 2008 | Filed Under Budgeting, Financial Peace Baby Steps, Financial Planning 

2 Responses to “The Cash Envelope System – The Benefits of Using Cash”

  1. crunchy cute on January 29th, 2008

    my husband and i recently started the cash envelope system of budgeting.

    i have saved so much money in the past two months! it really does work.

    using cash instead of credit cards makes you fully aware of your spending.

    but…i got tired of the plain envelopes and so i made my own – check them out – they work great!

    http://www.crunchycute.com

  2. Mona on February 5th, 2008

    Thanks for sharing and I will check out your site.

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