Extreme Budgeting: The Cash Envelope Budget System

At this point, you probably know you need some kind of budget. You may even have tried and failed to set one up. If you’re still earning less than you spend and can’t find places to cut, or can’t stop spending no matter how hard you try, it’s time to go extreme: the envelope budget system. It’s more work, but it will stop you from overspending, and prevent you from missing those important things like rent payments. Here’s how to do it.

Sort Out Your Bottom Line
As with any budget system, the first thing you have to know is your baseline spending. Go through your receipts, credit card statements, checking account, etc. to total up the following items for the past three months:

  • Housing (mortgage, rent, property tax, maintenance)
  • Transportation (gas, maintenance, bus pas)
  • Insurance (auto, medical, life, etc.)
  • Car Payment
  • Child Care
  • Food (groceries)
  • Utilities (gas, power, water, basic home phone)
  • Other Loans
  • Education
  • Clothing (basics necessary for survival)
  • Medical

These are your minimum expenditures. You must pay for these no matter what. You may be able to find wiggle room in the food budget through couponing and sales, but obviously you need to eat.

Divide each total by 3. Now you have an average monthly cost.

Deduct the monthly total from your monthly take-home pay. If you have something leftover, you can setup an envelope budget. If you don’t, then you need to either find a way to make more money, or find things you can cut, like cable, cell phone, or eating out. For extreme situations, you may need to sell your car and get a bus pass.

Determine Your Nice to Have Items
Let’s assume your income more than covers the essentials listed above. Now figure out your nice-to-haves like:

  • Savings
  • Retirement
  • Cable
  • Cell phone
  • Eating out
  • Entertainment
  • Clothing (beyond the basics)
  • Subscriptions
  • Gifts

Savings and retirement are actually must-haves, but you can’t deal with them until your core survival expenses are met. Then put them at the top of your list of excess cash.

Determine How Much You Should Budget for Each Category
The must-haves are easy to budget for. You know how much your mortgage or rent is. You know approximately how much gas costs (although you should budget extra for rising pump prices.) The harder part is the nice-to-haves. Start with retirement and savings. Designate $50-$100 per paycheck if you can. At the very least, designate something. Gifts don’t happen regularly, so estimate the amount you spend in a year and divide it by 12. Put that much in every month so it’s saved up for when you need it.

Divide Your Pay Among the Categories
In a traditional system, you would now cash your paycheck and divide the proceeds among envelopes for each of these. Since we now operate on a cashless basis for most recurring payments, it takes a couple extra steps, but you can still do it.

Create envelopes for each spending category, or for subcategories if you could be tempted to spend all of your auto money on gas and leave nothing for insurance. Write the total amount you must or would like to spend each month on the envelope. The total on all envelopes must not exceed your income.

You can still create an envelope for items you pay automatically, but remember not to withdraw that amount from your checking account later. If you write a check for the item, make an envelope and put the check in it at the start of the month.

At the start of each month, write the checks you normally write, or set up the online payments for them. Deduct this from the amount you have left, even if you don’t withdraw it. Now, go to the bank and withdraw the balance in cash.

When you get home, divide that cash between your envelopes. For example, you know you must save $100 a month towards car insurance, put $100 in that envelope. You know you’ll need to spend $30 a week on gas for your car. Put that in the gas envelope. You know you’ll need to spend $60 a week on groceries. That goes in another envelope.

Organize the envelopes in an accordion file. Write the date deposited and the amount on the front of the envelope. If you get paid bi-weekly, you may need to replenish your envelopes mid-month, but don’t go over your monthly budgeted amount.

Spend Only What’s In the Envelopes
When you need to buy something, take the money out of the appropriate envelope so you can pay for it in cash. When the cash is gone, you’re done spending in that category for the month. Do not borrow from another envelope to make up the gap.

When it’s time to pay something like auto insurance, deposit your accumulated savings back into your checking account and mail the check you have waiting in the envelope. Eventually you’ll be able to save up the money for these things without actually withdrawing it.

Record expenditures on the front of the envelope so you can see how much you realistically spend. Revise your budget accordingly the next month, or look for ways to cut back.

Make Saving Automatic
If you can’t make yourself put money in your “savings” and “retirement” envelopes, or you pilfer from it to cover the gap in other envelopes, then make sure you never get the money in the first place. Set up automatic withdrawals and sign up for your company 401K plan. That way the money is whisked into your savings account or retirement account before you ever see it. If you don’t see it, you can’t be tempted to spend it.

After a while, you won’t need the envelopes anymore, but this tool can teach you to control your spending if you just can’t figure out how to live within your means. If you prefer an online system, try Mvelopes , which does it all for you, but doesn’t require you to spend it all in cash.

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