Thanks to Nichole for sharing her insights today while I'm recovering and spending time with the newest member of the Six Figures Under family. I'll share more baby details later this week!
Before my path to debt freedom, I was the Queen of Credit Cards and cash back rewards were my best friend. Fortunately, I never experienced credit card debt. However, I was and still am not anywhere near the Credit Card Master Minds as Stephanie and Mr. SixFiguresUnder.
In fact, my husband and I cut up all of our credit cards three years ago. Yes, you read that correctly. We do not have a single credit card in our name. We travel all around the world. We are Americans living in England. We not only survive but thrive without a single credit card. Crazy, right?
Are you wondering what happened to us three years ago? Well, a few months after our wedding day. We woke up from our honeymoon bliss to $170,000 of DEBT!!! We definitely worked too hard and made too good of money to be in this financial mess.
That same week, we came across one of our wedding gifts. Dave Ramsey’s book, The Total Money Makeover. We were immediately sold on his plan and signed up for his class, “Financial Peace University” at a local church.
If you are unfamiliar with Dave Ramsey’s approach to personal finance. He encourages the use of cash envelopes. Being the former Credit Card Queen, I most definitely rolled my eyes at this approach, but went along with it for the sake of my marriage.
A funny thing happened when we started using cash instead of our cards. We spent less money. Significantly LESS! We are talking about hundreds of dollars each month! Thousands each year!
After three years of using cash envelopes. I would NOT go back to using credit cards. EVER! Okay… maybe if someone paid me a lot of money. But definitely not for the measly 1-5% cash back reward most credit cards offer.
How to Implement a Cash Envelope System
- Every new month you Establish a Budget. You can use any budgeting tool you desire (YNAB, Mint, Spreadsheet, Pen & Piece of Paper).
- Decide which Categories will be Cash instead of using your debit/credit card.
- Categories with discretionary spending (grocery, entertainment, restaurants, clothing, etc.) are great places to start.
- Areas where you tend to go over budget, would also be a great place to implement using cash.
- At the beginning of each month, get the budgeted amount of Cash from the ATM.
- Place the correct amount of Cash in the each Designated Envelope.
- Before going to the store, simply Take the Cash you need for that shopping trip.
Any time throughout the month you can check your budget, by simply peeking at how much cash you have left. Once your cash is gone in an envelope. You are done spending in that category for the month.
Cash Budget Categories
Our cash budgets include: Groceries, Restaurants, Entertainment, Blow Money/Fun Money for each of us, Husband’s Work Expenses, and a Miscellaneous fund that covers unplanned small expenses, like an invitation to a last-minute potluck.
Non-Cash Budget Categories
We choose out of convenience to have our monthly bills on automated payments. We pay for gasoline with our debit cards to save time. We use debit cards while vacationing for our safety because we do not want to carry large amounts of cash in unfamiliar places. Everything else is paid for in cash.
Benefits of Using Cash Envelopes
- Spend Less Money
We are a lot less likely to purchase any “extras” because we only have a set amount of cash. Those cookies do not make it into our grocery cart. At restaurants, we are conscious of our entree selection if we really want dessert. We certainly do not want to be embarrassed at the cash register by not having enough cash.
- Simplest Budgeting System
We have found in our years of budgeting that the simpler, the better. The cash system does not require you to keep a running total of your expenses in each category. You do not need to use a fancy budgeting app or program. The more simple our budget. The more likely we stick with it and not make mistakes.
- Impossible to go Over Budget
Using cash guarantees that you will stay within your budget. Once the cash is gone, it is GONE!
- Controls the Mindless Spending
The cheap $1 toy your child wanted at the Dollar Store. The $3 coffee. The $2 parking. The $.75 candy bar and $1.50 soda. The adorable $5 clearance item you could not say “no” to. We do not think twice about these small purchases, but they add up to A LOT over a month. I encourage each adult or each family member to use a “fun money” cash envelope for these small, random, non-essential purchases. You will be surprised how quickly this fund dwindles down or how many times you have to tell yourself “no.”
How about you?
- Which budget categories do you use cash envelopes for in your family?
- Have you implemented cash envelopes and found similar or different results?
- Which budget category is consistently over budget? Would a cash envelope work?
Nichole is is the Budget Loving Military Wife who writes about her Journey from Debt to Wealth. She is a frugal living, personal finance nut who loves a good deal. Her husband’s military career has her living in England, traveling Europe, and experimenting in the kitchen to discover copycat recipes from her favorite American restaurants.