Planning

American Family Budget: The Pros and Cons of a Cash Envelope System

The Pros and Cons of a Cash Envelope System :: Mint.com/blog

My husband and I switched from using our debit card all the time to paying for most things with cash.

Our goal is to use paper money and completely cut out plastic. Since our society is so credit-card-centric, we have faced several challenges in switching away from it, not the least being organization.

Since we’re new at this, we are trying what many others have sworn works well for them: an envelope system.

We have found that some things work well but some aspects of our system are downright frustrating.

The Setup

At the beginning of the month, I go through our budget and determine the amounts of cash we’ll need to cover each category.

I start from our monthly average, then adjust based on what I expect our expenses will be over the next 30 days.

Then I decide what specific bills I’ll need. For example, I need seven hundreds for groceries, two twenties and a ten for my miscellaneous spending money, and so on.

I total each one up into a list, and bring that with me to make it easier for the bank teller.

The Pros:

Control: There’s no way to accidentally go over budget in a cash category. When the money’s gone from the “restaurant” envelope, there’s no more eating out!

I also enjoy being the Keeper of the Money. We don’t carry all this cash around with us all the time. We keep the envelopes in a special spot.

When Stewart needs some cash for things like potting soil or a treat for the kids, he comes to me and asks, even though he knows where it is and can take the money out and note it on the envelope.

He also gets $50 of spending money that he can use however he wants to, no questions asked.

Ease: The envelopes are intended to release me from meticulous accounting.

I don’t have to make sure every purchase goes into the right category in Quicken, because I already know that $50 was for “spending money.”

Physical reminders: As I’m putting all the right bills into their envelopes, I feel happy.

The money is a visible, touchable reminder of our efforts and our progress toward taking control of our spending.

At the end of the month, we can see any leftover money – it’s another visual affirmation.

We can deposit that cash in our savings account, use it as an end-of-month treat, pay it forward to have more money in that envelope next month, or redistribute it to another category where we felt a lack.

The Cons:

Reduced spontaneity: All that cash doesn’t do you any good if you forget to take it with you when you need to make a purchase.

Since I’m not comfortable carrying $1,200 around with me, I have to plan my day in advance, knowing whether or not I’ll need cash from the “household” envelope to buy cleaning supplies at a discount store, or “parking” fees, or “postage” money for stamps.

Multiply this scenario times two people and you have quite a clumsy accounting system.

At first Stewart blithely used his debit card several times instead of cash, which made me, the spreadsheet nerd, lose my mind over the math it created.

Every time one of us makes an unplanned cash category purchase with our debit cards, I have to remember to account for it in the budget and in the check register in Quicken.

I try to find a creative way to get that amount back into the bank account.

For example, I asked Stewart to pick up some groceries on his way home.

He didn’t have any grocery money with him (or any cash at all, which is ridiculous considering we are now the all-cash family) so he used the debit card to buy $30 worth of groceries.

The next time I got gas for my car, I handed over $30 from the “groceries” envelope.

Yes. It’s mentally exhausting. So all this time and worry I’m supposed to be saving by switching to cash is not quite working out.

Potential for Loss: Money, money everywhere. Stewart leaves his spending money in a pile on the bedside table.

I take grocery money with me to the store, and forget to put the change back in the envelope. The kids get their allowance and put it away sometimes but leave it out sometimes too.

Money for different categories proliferates in my purse. There is money everywhere I look.

While that might sound like a good problem to have, it drives me crazy, because it’s the opposite of the organization I crave.

If you’re following along, you might observe that I am making a lot of extra work for myself, and that may be true.

After all, if I use my debit card for all purchases, Mint.com will happily sort each transaction into the category that I select for it.

But despite the cons listed above, I have indeed found that setting aside a finite amount of cash for most purchases truly makes me more mindful of how much I am spending and more likely to stay within budget.

Tips

I keep reminding myself that we’re in an adjustment period. We’ve been doing this less than three months. Learning from our mistakes is an important part of the process!

I’ve gotten great tips from others to help make our conversion to cash work.

My friend Suzanne uses a coupon and receipt organizer to carry her cash in her purse nicely filed into categories. That could work for me if I just take some of the money with me.

And Mint reader Micah suggested a “cash emergency fund,” something to cover any category that you can “pay back.”

I’m considering arming Stewart with a fund like this so I can call on him to run errands on his way home from work if I’m in a time crunch.

If you use mostly cash, what works for you?

Kim Tracy Prince is a Los Angeles-based writer who has a husband, two little boys, and a slightly unhealthy obsession with spreadsheets.  She publishes kimtracyprince.com.