Whether you want to start using cash envelopes, or someone has suggested using a cash budget is the best way they’ve been able to stick to their budget, you’ve got some questions. I’m going to walk you through some of the most common tips, tricks, and questions regarding using cash envelopes. And because I always find it helpful to see how people are using and adapting something to work for them, I’ll break down how we use cash in our budget as well.
Why You Should Use Cash?
Some of the biggest names in personal finance will tell you to use a cash budget. The reason? Cash is king!
What that means is that by using a cash budget, you can easily see what you have left in your budgeted categories rather than flying blindly with each swipe of the debit card, and eventually overspending.
Just because someone recommends that you should use cash doesn’t mean that you have to. The truth is that you need to know your level of self-discipline when it comes to your debit and credit cards.
If you are someone that already has a strong discipline and don’t swipe without thinking it through, good for you! Hubs is in good company. But I have to say I am not one of them. I do so much better when I can see what is left in each category rather than a vague number subtracted from a bank account estimate.
So, should I use cash in my budget or not?
Yes!
Years ago I was against using cash because I thought it made it too complicated since we didn’t have a physical bank location within a 2-hour drive of our house. I was very limited with what denominations local ATMs had. Combine that stress with always having two young kids in tow, I thought it was best for our budget to not carry cash on me at all, and skip the ease of expense tracking with what cash is left in each envelope.
Ironically, keeping track of coupons and coupon deals was something I was willing to do. To each their own.
As my kids got older and required less of me watching them 24/7, I tried a 30-day cash budget experiment and found that even though there was a little more legwork to fit it into our budget (more on that later), using a cash budget absolutely helped me keep track of our overall spending and how much we had left in each category.
I know that it also helps our kids. They each have an envelope for their allowance that is filled once a month, on Hubs’ paydays, along with any extra chore money they earn. They can easily see how much money they have saved up, or how much they spent because their envelope is empty.
Using a cash budget works. But with that, so must you.
That means sticking to your budgeted amounts only, and not using your debit card “just because”.
How To Get Started Using A Cash Budget
First, you have to make sure that you have a zero based budget set up. It is hard to start implementing a cash budget strategy if you don’t have a budget set up first.
After your budget is set up, you need to look back at your expenses. That means looking at the last 3 to 6 months of purchases, and seeing what amount you spent on food, household items, personal care items, clothing, restaurants, gifting… you get the point.
Track what you spent, and then total up how much you spent during each month.
Were you pretty spot on each month? If you spent $500 on food one month, and then $550 the next, that’s pretty consistent. I would budget on the higher end first, and if you don’t need that much in your budget, you can always reduce it the next month.
Did you spend an exorbitant amount on eating out each month? This would be an excellent place where a cash budget will help you. If you spent $100 on eating out for a month, and then $300 eating out the following month, try starting with $100 in cash each month to spend on restaurants.
This way you are not completely cutting yourself off from eating out {I get that there are numerous situations where eating out is just what needs to happen because it is better than not eating at all}, but at the same time, you’re trying to stick to a budget rather than going overboard.
What Categories Do I Need For Cash Budgets?
As I mentioned, using cash is best for parts of your budget that you tend to spend blindly on. I would not use a cash-based budget for monthly bills and most non-monthly expenses.
That said, these are the categories that work best for our family:
• Groceries
• Household/Personal Care
• Family Fun {our eating out / movie money}
• Pet Care
• A Allowance
• O Allowance
• B Allowance
• K Fun Money
• D Fun Money
• Hair
• Clothing
• Vacation
• Back to School
• Miscellaneous
Some other cash categories used by others are:
• Fuel
• Baby
• Lunches
• Auto Maintenance
All of these categories don’t get used every month, but these are categories I have envelopes made for and will fill when we need them. For example, when I’m writing this, it is April. I have started our Back to School category, so this envelope just started filling up.
And to be clear – I didn’t start a cash budget with all of these envelopes. I did start with Groceries and Household/Personal Care because those were the two categories I had the hardest time getting the spending under control, even after we slashed our grocery budget by half.
The other categories I added in over time. Our Hair category, for example, is because the barbershop Hubs and my boys frequent only works in cash, so I prefer to just have some cash on hand for that specific purpose rather than pulling from a different envelope and then trying to remember to refill it.
How Much Cash Do I Need To Take Out?
The simple answer is as much as you need to cover your categories, but not more than your budgeted amount. And that is going to take some effort on your part. Check to see how much you spent in each category for the last few months.
Now to the calculating part.
Let’s say that you are paid $1000 weekly, and you know that you spend $150 on groceries and $20 each week on household and personal care items. That totals to $600 each month for groceries and $80 per month for household and personal care items. You know that you also spend roughly $60 on pet food and supplies for the month or about $15 per week.
So with your weekly paycheck over 4 weeks, you would take out $185 in cash divided up like this:
Which denominations you use are completely up to you.
Like I mentioned before, I don’t have a bank location near me. So I rely on ATMs in their network and the denominations they offer. For me, knowing that the ATM I need to use only does denominations of $20, I would take out cash denominations like this:
That way I still have the monthly amount for each category, but it’s divided out each week a little differently based on only having an ATM with $20 denominations available.
The first week I would take out $200, putting $160 in groceries, and $20 in household and pet. The second week I would only take out $180, putting $20 into household and pet each, and then leaving the remaining $140 for groceries. I do it this way because the first week I took out $10 more than the $150 per week that I normally spend, so this week I am taking out $10 less than that average amount.
How To Use A Cash Budget
When you are out at the store and it is time to pay, you will take money from the cash envelopes for that category. Leave your cards where you cannot get to them easily, and don’t use them for categories that you have in cash.
This takes a lot of self-discipline. Don’t get discouraged if you aren’t sticking to it right away.
What If I Have Money Leftover?
This goes off personal preference. I know some people in the debt-free community love to head to the bank, deposit that unused cash in their checking accounts, and either stick it in savings or make an extra debt payment! And that’s awesome!
But that doesn’t work for us.
Like I mentioned before, we don’t have a physical location of our credit union near us. So when we have extra cash leftover in our envelopes, I save it for the next time I fill the envelope.
For example, if I have $20 left in my grocery envelope, I will reduce how much I take out for groceries next time by $20, and pay an extra $20 towards debt.
In the end, you need to use a method that works for you.
What If I Do Spend All The Money?
In this case, to stick to your budget and reach your overall financial goals, you need to go back to the drawing board.
You need to reassess your categories to where you can spend less in during that paycheck, and then stick to it.
With the next paycheck, you need to go back and reassess. Did you underestimate the amount you would need, or did you overspend? Either adjust your budget categories as necessary or tighten in the spending reins.
How Do I Share Cash Envelopes With Others?
I am the one that usually does all the shopping. All. But in the rare instance that I need Hubs to pick up something, most often I will tell him to use his spending cash, and I will reimburse him when he gets home from the proper envelope.
For example, he usually carries a $20 on him. If I needed him to stop for some milk and coffee on the way home, he will use his $20, hand me all the change (bills and coins) when he gets home, I will put the bills in the grocery envelope and hand him a $20 from the grocery envelope. This is what works best for us.
Find a system that works best for you. If you split the shopping equally, then split the cash envelope equally.
Using Cash Envelopes:
You can use any envelopes you have! Use envelopes from junk mail, use mailing envelopes, make your own, use printable envelopes… use whatever works!
I go back and forth between using laminated envelopes and printable envelopes that fit inside my wallet. You can check out how to make your own laminated cash envelopes, or purchase your own printable cash envelopes. You can also get a free set of printable cash envelopes in my Resource Library.
Recently I have been keeping the categories I use the most often in my wallet, and the categories I don’t use as much at home in the planner. This isn’t always the case, and what I use at the time depends on how busy that particular season of our life is.
During our COVID-19 self-isolation, we used our debit card and ^^cashless trackers^^. Again, it depends on the season of life we are in; use what works best for your current season of life.
Online Shopping On A Cash Budget
Is it even possible to incorporate online shopping with a cash-based budget? The short answer is YES!
There are a few ways you could approach this. First is you could take out that money in cash, and use it to buy a gift card or a prepaid Visa, and then use that online. If you’re someone who tends to add a lot of stuff to your orders just because, this may be the better option for you you’re limiting the amount on that card.
We do it a little differently. In my Budget With Me videos, I break down cash envelopes to include a Pet/Chewy category. Our household has a puppy, a geriatric cat, and two male rabbits. It is infinitely easier for me to have the majority of our pet supplies delivered to our house rather than hunt it all down between four different stores. I keep what we need on an 8-week autoship, and budget for it each month.
While I could keep our debit card on file with Chewy, and pay for it outright, I don’t. That means, yes, we do still use our credit cards even in debt repayment. For a detailed explanation of why you can check out this post.
But whatever the amount was that I have on our autoship that month, I budget for it that month and then pay it off on the credit card that month. I don’t give it time to accumulate interest and carry the balance.
Make Sure You Succeed
To succeed at using and sticking to your cash budget, make sure you have clear financial goals. Understand why you are going through this process of making the budget and sticking to it.
Don’t forget to reassess your budget categories periodically. Spending habits change as you go through life. While our family of 5 hasn’t grown larger, my kids certainly have grown bigger than when we first started budgeting. Feeding two teenage boys is a real struggle. I have had to adjust our budget to meet not only our grocery spending needs but also our fuel spending. School activities for three is also a struggle.
As with all things personal finance, it is very unique to your situation. Find a balance that works for you. And don’t forget to give yourself some grace as you’re starting your cash budget.
Do you have any tips on using cash in your budget? Leave them below!
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