When my husband and I first developed a household budget as newlyweds, we had a difficult time actually staying within it. We would swipe our debit cards and just estimate how much money was left in each category. We figured that spending a bit above each in category wasn’t a big deal. Wrong. While our spending wasn’t catastrophic, we weren’t seeing the results that our spreadsheet was promising.
The trick was trying to find a way to break the bad habits that we had developed and find a fool proof way of sticking to our budget.
While driving around Okinawa and flipping between the two available English-speaking radio stations, I came across Dave Ramsey’s talk show. If you’ve ever listened to his show, you know that he believes in living a debt-free life and using the cash envelope system to stay true to your budget. While this seems like an extreme approach, sometimes extreme is just what you need to develop good habits.
We decided to give it a go. I created my own envelopes using cardstock, punched holes in them and kept them a leather planner I had. I carried cash with me everywhere I went. We had a separate envelope for each of our budget categories and were only allowed to spend what was in each envelope. As the first month went on, it was painful to see the amount of cash in each envelope dwindle away.
We stayed on the cash envelope system for just over a year – until I was certain that our spending habits had changed. We now swipe our debit cards much more cautiously and double think each purchase. If I ever feel that we are struggling with our budget now, I threaten to take out my envelopes again and we miraculously get back on track.
So what are some tricks for successfully using the cash envelope system?
Make an envelope for each of your main budget categories. It should be pretty clear which category each purchase belongs to. Our envelope categories include groceries, car, dining out, entertainment, Milo (the dog), household and allowances (an envelope for each of us).
No Borrowing – When You’re Out, You’re Out
When you get towards the end of a month, you might notice that one envelope still has a lot of money leftover, whereas another category is looking very skimpy. Do NOT borrow from one envelope to make purchases for another envelope, no matter how tempting it may be. You are trying to learn how stay true to a certain dollar amount for each category and you will miss that lesson if you borrow from other envelopes. If you spend all of your dining out money too early in the month, you will be eating at home the rest of the month. End of Story.
Your budget will not be perfect the first month and that’s ok. You will likely over budget in certain areas and under budget in others. Don’t get frustrated, but instead adjust your numbers the following month. Expect about 3 solid months before you get an accurate budget.
Pay Yourself First
I’m sure you’ve heard this before. Transfer money into savings as soon as you get your paycheck and then budget the remainder for your monthly bills. If you wait to transfer money into savings at the end of the month, there often isn’t much left. If you transfer money into your savings at the beginning of the month, however, you often miraculously figure out how to pay your bills with the remaining funds.
Have Some Fun
As I said earlier, my husband and I each had an envelope labeled “allowance”. We received the same amount of money each month and were able to spend our allowance on anything our hearts desired (within reason). If I wanted to spend my whole allowance on fancy cheese one month, my husband couldn’t get upset. A nice pair of shoes that I probably didn’t need? That’s what allowance is for! The allowance envelopes allow for some free spending that wouldn’t otherwise fit into another envelope. It helps keep arguments down and also helps keep my natural spending habits down. I usually spend my allowance on the first of the month each month while my husband lets his rollover until he wants to make a bigger purchase (like a surfboard for example).
The cash envelope system really was a blessing to our financial well-being. We started with a fresh budget together and learned how to stick with it together. It opened up the lines of communication in our marriage and set the groundwork for our financial future. We love to watch our savings accounts grow and are meeting our financial goals. I can attribute all of this to the habits we learned while using the envelope system.
Have you used the cash envelope system before? Do you have any other tips?