In an earlier post, I mentioned that my family has decided to do away with credit and debit cards in 2011. Instead of throwing down a card anytime we make a purchase, we are going to be using cash. Now, this doesn’t mean that we are just going to change from plastic to paper, we are going to be putting in place an entirely new budgeting system to eliminate careless spending.
Here are the steps to how you can create your own cash envelope system:
Step 1: Create Categories.
After analyzing our budget with Mint’s FREE online budgeting software, we determined that we needed to divide our expenses into several different categories. We chose categories based on things we typically used our debit card to pay, like Groceries, Dining Out, Entertainment, Household, Clothing and Gifts. Many things, like car payments, house payments, church tithe, etc. do not vary from month to month, so they are not figured in.
Step 2: Determine Budget Amount
The budget software really helped me to figure out what I was spending each month in the before-mentioned categories. The next step was to decide how much I wanted to try to spend going forward. Remember, the idea is to spend LESS!
Step 3: Put Cash in the Envelopes
We only get paid once per month (the last day of the month) so that makes planning really essential. For us, it makes the most sense to pull the cash out of the bank on the first day of each month. If you are paid twice per month, you may choose to do this bi-weekly. Be sure to know exactly how many of each type of bill you will need before going to the bank, so you are able to place the exact amount of cash correctly in each envelope.
Step 4: Use the cash
The idea is to use cash only for your expenses, and to make it work you have to abide by this one rule: when cash is gone, you are done spending in that category for the month.When you make a purchase in any of the categories, simply place the receipt in the envelope so that you can see exactly where your money went.
Step 5: Analyze
At the end of each month, take a look at your envelopes and determine how you did. If you have extra money still left, you will not need to pull as much cash out the next month! Continue to find new & creative ways to cut back on your expenses and I think you will find that you really can do more with less!
If you are already using the Cash Envelope Method, I’d love to hear about your experience! Please feel free to leave a comment below!