It was month 4 of my 6 month study abroad program and my bank account had dwindled faster than I cared to admit. I needed a way to make the money last through my remaining travels and trips and what I was doing wasn’t working. I realized that swiping my debit and credit cards was easier than having to do the mental calculation of converting the pounds into dollars. This made me underestimate my spending and I needed to cut back ASAP. I decided to completely switch to a cash only budget and hid my debit and credit cards. That’s how I started unknowingly using the cash envelope method. Related Content: 
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Why Budget?
It’s important to know why we’re budgeting. What are we hoping to achieve? When I was studying abroad my goal was to have as many adventures and trips as I could, so it made everything else less of a priority and allowed me to allocate my funds appropriately. Once you know what your ultimate goal is – saving for retirement, traveling, saving for a down payment, etc, then you can mold your budget to fit your needs and lifestyle. Things will get hard before they get easy and you’ll have to hold on to your “why” throughout the obstacles you encounter. Budgeting requires discipline and sacrifices but eventually you’ll realize it was all worth it.Is The Cash Envelope Method Right For You?
That’s one thing that a lot of people tend to forget. There is no “correct” way to budget. You have to find a system that works for you and that is sustainable with your lifestyle. The cash envelope method is a popular method but there are also cashless budgeting methods that are worth considering. The cash envelope method works great for those who struggle with impulsive purchases, online shopping, and the easiness of swiping a credit card. It helps you physically see the amount of money you have to work with that month and since you’re not able to access all of your money at once, you end up spending less.
How It Works
The cash envelope method is simpler than you think. When I was in England, I only had 1 envelope. I budgeted a weekly allowance for groceries and fun (my living expenses were covered by my parents already, #grateful). If I wanted to take a trip that week, I ate cheaper food and let myself have more money for “fun”. I am all about intuitive spending so I knew that I shouldn’t restrict my spending for every single category. I needed one broad category and it worked for me. The basic process of the cash envelope system is:- Analyze your current spending habits
- Determine the cash envelope categories
- Create a new budget for each category
- Stuff each envelope
- Track your spending
- Review your progress
1. Analyze Your Current Spending Habits
It will be much easier to create cash envelope categories if you know what you’re currently spending money on. Print out your last 3 months of bank statements and grab your highlighters and sift through your transactions. You’ll be able to start seeing patterns of categories and the amount you spend on them. Calculate the amount you’re currently spending on each category and determine whether you’re happy with that or if you’d like to cut back in that category. Now you’ve been able to not only realize the categories you need, but the amount each envelope should hold.
2. Determine The Cash Envelope Categories
The cash envelope system is designed by determining the most common categories in your spending habits. When you went over your bank statements you probably noticed numerous categories but you don’t necessarily need envelopes for each one. Take a moment to think about your personality and what works best for you. If you’re more of an intuitive spender who doesn’t like restrictions then you will probably do better with less categories. If you are all about crossing your t’s and dotting your i’s, you will probably have a better success rate with more cash envelope categories. Remember, personal finance is just that- personal. What works for me might not work well for you. You can always update your categories and revise your budget next month if the first version of this method doesn’t work for you.Fixed Expenses That Don’t Need Cash Envelopes
Fixed expenses such as your rent and car bill won’t change month to month so you don’t need cash envelopes for them. The easiest thing to do is to set up auto-pay for your fixed expenses and take out cash for everything else. This will keep you from having to carry around large sums of money and will simplify paying bills. The most common fixed expenses are:- Rent/Mortgage
- Car Insurance
- Cell Phone Bill
- Internet Bill
- Utilities – this expense can vary tremendously if you blast the AC during the summer or turn your home into a sauna in the winter. But, most likely you will pay this online and it’s easiest to set this on auto-pay. If you choose to include this into your cash envelope categories then go for it! It’s all up to you!
- Paying off debt, student loans, car loans, etc.
- Savings & Retirement
Common Cash Envelope Categories
Cash envelopes work best when they are used for your variable expenses. If you have trouble sticking to a cashless budget, these envelopes will help you physically touch the money that you have and will make it harder to spend it. The most common categories are:- Groceries – It can be difficult to bring cash with you to the grocery store, but it can help you overcome those impulsive purchases (salt & black pepper chips always get me).
- Eating Out – When you’re out with friends it’s easy to get carried away and start ordering apps and sangria, but if you leave your card behind you’ll be forced to stick to the cash in your purse.
- Gas- I’m a Realtor so this one is a bit harder for me to monitor since some days I drive 20 minutes whereas others are hours. If you tend to have a pretty regular commute, you’ll be able to budget for this better. (I do recommend keeping an extra $20 stashed in your glove compartment so you don’t get stranded if you ran out of your cash envelopes).
- Shopping – Bringing cash to TJ Maxx will help you from getting distracted by the cutest new sandals. Go in with intention knowing exactly what you’ll purchase and what you’ve budgeted for. If your online shopping cart is always full, you might want to check out these 5 Ways To Curb Your Online Shopping Habit.
- Sinking Funds – These can be anything from car repairs to wedding gifts. Plan ahead for these as soon as you know they’re coming and set aside money for them.
- Miscellaneous – This is the “extra” money. Chances are when you’re first starting out you will under-budget and over-budget in certain categories. You can use this envelope to plan for that.
3. Create A New Budget For Each Category
Now that you’ve determined what your categories are, you can start allocating money for each envelope! Use your earlier analysis and determine what budget would work best for you and your lifestyle and remember to keep your savings goals in mind.