Q&A: Using Cash Envelopes

Q. I’m wondering if you have any words of advice or suggestions about making the cash system work. We are transitioning to it right now and it is bumpy going. I know you and Eric have been doing it for awhile and I was hoping you might have some insights or suggestions as to how to make the process easier, having survived it yourself. I feel like I’m herding cats, trying to keep track of all of it!

--Chris, a reader in Des Moines, Iowa

A. We only use cash for two categories: food (eating out and groceries) and hair care. We wanted to “start small” with two envelopes and we ended up not adding more. These are two things that always get purchased in person and can require tipping, so it's great to have cash on hand. We also love the fact that we often don't have to wait for change or to have our debit card run at restaurants -- we can simply leave money on the table and walk out.

If you're using more than a few envelopes, I can imagine it could be overwhelming at first. It will get easier with time, and it may take three months to get a good feel of how much money you will need to put in the envelopes at the start of your pay period. We budget $100 for food each week. We used to do $90 but found that the extra $10 was a little more accurate and a lot less stressful.

When we started out, we wrote on the outside of the envelope when we spent any money from that envelope (see photo above), so we could see how much we had left. Now, two years later, we have a good idea of what it feels like to spend $100/week, so we don’t need to write it down anymore. (As a somewhat-unrelated side note, in the past month we've also been using more coupons, so our food money has gone farther and we've been able to enjoy more what we call "quick-service" meals. Yea!)

Other Envelope Categories We've Considered

  • Date night ($10/week)
  • Household supplies: laundry detergent, toilet paper, paper towels, napkins (there is no set amount for this on our budget; it gets added as needed)
  • Toiletries: personal and beauty products ($10/week, but if we don't use it all we don't save the difference for upcoming months, we just use that money for other things)
  • Babysitter (for those of you who have kids, how much would you recommend for this category?)

As with food and hair care, it would just be nice to have the money for those categories set aside in cash so we don't go over (like we commonly do with toiletries) or feel guilty about spending the money (like I do when I buy things that seem unnecessary, like perfume).

What We Don't Want or Need Envelopes For

  • We don't have a gas envelope because, lazily, that would mean we'd have to go inside to pay for our gas. Instead we budget a near-accurate amount using an Excel form that Eric made to help us predict how much money we will need to fill up our vehicles between paychecks (depending on if we'll be traveling or not).
  • We have a joint account that our paychecks go into and all our bills are paid out of, and then separate accounts with our personal allowance/clothing/shopping money. I am an online shopper and our cash envelopes should obviously be only things we buy in person.
  • Our entertainment money ($30/month) gets spent more often online via iTunes for songs or audio books and less in person like at the movie theater, so we keep it in our bank account rather than in cash.

>> For envelopes, we use Dave's starter envelope system ($13) and recommend it. I believe it comes with the Financial Peace University kit, or it can be purchased separately on his website.