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How to Create a Household Budget: Part 6

Welcome to my 6 part series on creating a family budget. You can read the entire series or use the handy links below to navigating to a particular lesson. Thanks for reading Trees Full of Money! If you haven’t already done so, please consider subscribing to my free email newsletter or RSS Feed.

Table of Contents:

In part #4 of my ongoing series about getting your family (or yourself) on a budget, I briefly mentioned the cash envelope system of money management. 

I’ll be the first to admit the cash envelope system isn’t ideal for everyone.  However, when all other attempts to control your family’s spending have failed, the cash envelope system may be able to help.

What is the Cash Envelop System:

The cash envelope system of money management is exactly what it sounds like.  Instead of using checks, debit cards, and credit cards to pay your monthly expenses, you switch to using ONLY cash! 

You divide the cash up into separate envelopes by the various categories identified in your budget. 

One envelope may be for “Food”, while another may be marked “Clothing”.  When you’ve spent all the money in the envelope, that’s it!

Each month you withdraw enough cash from your checking account to cover all of the expenses you have listed on your written budget (assuming you earn enough to cover your expenses). 

If you haven’t worked up a written budget yet, you’re in luck!  My free budget spreadsheet  and budgeting guide will provide you with everything you need to know about setting up your first budget!

Some families include their mortgage/rent, car payments, and utility bills in their envelope systems but I feel this is going a little overboard.  The system is best for the “variable” purchases you make every month (groceries, entertainment, gas, “fun money”, clothing, etc.).

How to Start on the Cash Envelope System:

Step 1:

In order for the cash envelope system to be effective, you must first know the approximate amount of money you spend each month.  If you’re not sure how much you spend on various categories each month, you really need to start back at the beginning of this series.

Step 2:

Don’t get suckered into buying an expensive Deluxe Executive Envelope System available from various financial gurus.  You can EASILY start your own cash envelope organizer with items you probably already have in your home!  If you have kids you can even make it a fun family project!

Not only will your children enjoy decorating the envelopes for your various budget categories, but their participation in the process (no matter how limited) may be just what you need to stay accountable!

Gather the necessary items.  This is pretty simple!  All you really need is your written budget, a  few envelopes, something to write (decorate) with, and a stack of cold hard cash!

Step 3:

Write a corresponding category on each one of your envelopes.  As I mentioned earlier I would forgo including an envelope for your mortgage, student loans, car loans, and utility bills.  These bills are generally “fixed” and are best paid online or by check.  The envelope system works by curbing your spending on “discretionary” purchases.

You can get as specific as you want in breaking up your envelope categories!  Most people I’ve spoken with seem to average between 7-10 envelopes.  

If you use my budgeting spreadsheet, you can easily change the category names to match your envelopes (and vise versa).

Step 4: 

Once you have your envelopes organized and stuffed full of money, its just a matter of following through with your plan!  Obviously you don’t want to carry all of this cash around with you every where you go, so you’ll need to “pre-plan” your purchases. 

This simple “inconvenience” will also prevent you from spontaneous shopping binges on your way home from work, etc (provided you’ve hidden your credit and debit cards).

Is the Cash Envelope System Right for You:

As I mentioned above, the envelope budgeting system is not ideal for every family.  In fact, Dave Ramsey himself (one of the biggest promoters of the envelope system), doesn’t use the envelope system.  Of course he is a multi millionaire many times over now!

Even if you have success using the envelope system, you will probably find that over time you no longer need it.  Inevitably your money management skills will get better using this system!

I hope you’ve enjoyed my latest series on budgeting!  I’ve learned a lot as I researched this series and I hope that you picked up something along the way as well!

Please share this information with your family and friends if you feel they could benefit from it!  Also, please consider subscribing to my free updates via email or RSS feed  if you haven’t already!  There are many more money stories and tips in store for my readers!

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{ 2 comments… add one }

  • Robert January 14, 2011, 12:01 pm

    Where do you hide the envelope? I had it in my security box but $1,000.00 came up missing so now I hide it in my suitcoat pocket in my closed.

  • Kelsey February 7, 2013, 11:24 pm

    I do believe all of the concepts you’ve introduced in your post. They are very convincing and can certainly work. Still, the posts are too short for novices. May you please extend them a bit from next time? Thank you for the post.

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