Saving Money with the Cash Envelope System
Paying cash for as many things as you can is a really good way to save money. It can get confusing though, when you get your cash out for the pay period and you have a few hundred dollars in your pocket. Confusing to try to sort through what you need to spend that cash on AND tempting to spend it all right then. The cash envelope system is a great way to get all of that organized.
The first step is to make a plan for your paycheck. Decide how much needs to go towards bills this pay period and how much is for the more adjustable items, such as food, eating out, clothes, medical, toiletries, etc. Once you have figured out how much cash you need to cover the expenses that you can pay cash for, withdraw it from the bank. Then get an envelope for each category and label them accordingly. Put the amount you have decided on the back at the top. We did this for a couple of years. Then we took Financial Peach University, a class by Dave Ramsey and the kit came with an envelope system that we have used since. Dave Ramsey has a great program and he details the cash envelope system in his books.
Let's use the example of food. If you have budgeted $200 for food for these two weeks, list $200 at the top. When you go to the grocery store, grab the food envelope entirely or just what you think you will need. If you spend $60 at the grocery store, subtract $60 from the $200 and you will have $140 left. Next time you stop for milk and spend $10, subtract that and you will have $130 left. Or skip this step all together and just know that the amount in the envelope for groceries is all the money you have for groceries until the next pay check. It is pretty easy to stick to your budget when you have the cash envelopes.
You can keep the envelopes with you at all times, or make sure to remember to grab cash before you leave the house. You can't use your debit card as a back up if you forget, because you have already withdrawn the money from your account. I have forgotten too many times, you would think I would learn. I just don't like to carry that much cash with me at all times.
Using the cash envelope system allows you to track any carry over amounts very easily. I budget $25 each pay period for medical and $25 for gifts (this does not include Christmas). I don't always have medical expenses and I don't always have to buy gifts. This money collects in the envelopes just waiting for the week when every child gets sick and I am at the doctor a lot, or the month when two of my kids have birthdays and I need to spend more than my $25 budget.
Using cash to purchase items really makes you think twice before purchasing. Especially if it is a somewhat frivolous purchase to begin with. Having to count out the cash at the moment of purchase will definitely keep you from overspending. Having the cash envelope system will force you to really think through things. If I don't have cash in my medical envelope and I have to take a sick child to the doctor, where is that money going to come from. I have to think through what the other envelopes contain and decide where I can cut. Maybe I can get by with spending only $180 on groceries this pay period, maybe I have a large surplus in the gift envelope, etc.
Using cash makes you stop and think and make good decisions regarding your money. When you slide your credit card or debit card through that little machine to pay for things, there really isn't much thought involved at all. This will frequently result in overspending and trying to figure out later how to pay for it. Using cash, you are forced to figure that out right now. Yes it takes some stopping and thinking at times, but it saves a lot of stress down the road.
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