11 January, 2012

Envelope Cash System

I've been on the cash system for a while. It is preferable for me because seeing the dollars leave my wallet and knowing that is all the money I have until payday makes me really conscious about what I buy.
in use

It's been harder to do since I moved back to CO. I will admit being able to use cash for all my expenses (minus bills) was easier. So it's an adjustment, but I still have no new credit card debt and am able to live comfortably and grow my savings.

Kelleigh Ratzlaff Designs had a template for a cash envelope insert. She even provides a free download for the envelope template, allowing you to use whatever paper you want to.

To get started with the envelopes, here is what I did: 
  1. Start with the amount you take home each paycheck.
  2. Divide your bills into what paycheck they come out of. 
  3. Deduct those bills from your starting amount (#1).
  4. Figure how much you need for gas, food and any fun money you want. The "fun amount" needs to be realistic, but it also needs to allow you to save and get out of debt (or whatever your financial goal is). Ask: what can you do each money that doesn't cost money? Where do you excessively spend money that you can cut back? For me, that was eating out. Cooking at home is cheaper, healthier and has become somewhat of a social thing for me.
  5. Take that amount (#4) away from your remaining funds.
  6. The rest goes into savings. 

I move the savings amount immediately after I get paid. I have also started leaving a "cushion" of fun money in my checking account for internet purchases, where I need a credit card number. But I do not transfer funds to my checking unless it is to pay bills. So if (hypothetically) I have $60 a week for food/fun and I use that all up by Tuesday, then it is going to be a sparse week until the next paycheck.

I would also recommend looking into balance transfers with a period of no interest. I did this with my car repair bills and am paying it down slowly over the course of the interest free period. I know Mr. Ramsey often says to start paying off your smallest debt and move up. For me, it was more cost effective to leave the smaller debt (with no interest) and pay off the bigger debt first (evil student loans!).

By doing the cash system completely - with envelopes for groceries, gas, eating out, clothes, gifts, etc. - and leaving your card at home it really does cut down on the urge to cheat. I didn't used to have a card with me, so if I didn't have cash it did not get purchased. For people who have trouble spending this really helps.

The other thing I like to do is to list where my money goes. If I didn't keep track I would get to the end of the month and be able to identify about a third of what I spent money on. I would recommend keeping receipts and creating a log book (that's what I do). Over time I realized I was still spending a lot on eating out and asked a friend to teach me how to cook so I could stay in and save more. I started entertaining in my home, which is cheaper all around, quieter and more intimate.

In the end I think it's good to do things to motivate/reward yourself. I added an envelope for big purchases (like a new camera or a vacation or even just a book fund) and when those funds reach a certain point go spend. Having to save up and wait for big ticket items really makes me evaluate if I truly want it and if it was really worth it after that much time and energy to save up for it.

We live in an instant gratification society and with the cash envelope, save up system it forces us to be patient and helps us realize that maybe we really didn't need it anyway. If you have any questions let me know, I'd love to share what I've learned over the last four years of doing this.

What budgeting tips have you found that really work for you?

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© Amanda Lunday