Budgeting with the envelope system for household expenses is a common personal finance suggestion. Because I'm always looking for a better system for our finances, I gave the envelope system a try last year to see if it was worth the hype.
Before you start throwing copies of Dave Ramsey at me and hissing loudly, let me add that the envelope system sucked for us.
(And I really wanted it to work. I was so excited about the idea of making some cute, matchy envelopes to use.)
If it didn't work for us, then that means that it may not work for some of you.
If you haven't tried this budget method yet, or if you're wondering why its not working for you, I'll break down the issues we had with using cash only/envelopes, and how it ended up losing us some money, so at least you will know a different point of view:
1. Different Payment Requirements Get Confusing.
Right here, I'm going to say that if all business and services accepted cash, then the envelope system would be perfect and we would all be sitting around on our our savings.
But...that's not how it works, darling.
First thing first, you have to decide what to pay in cash, what you want to leave in your bank account, and what gets automatically drawn out.
Some people only use cash for things like groceries, gas, fun money, and household goods. Others recommend cash for just about everything aside from automated withdrawals.
Maybe you've seen some of those cute photos with the little budget envelopes marked "cable", "electric", "vet"...
Basically, we discovered that because different companies required the bills to be paid with different methods (cash only, debit only, money order only, etc.) it was a huge hassle to put cash in an envelope only to have to use it later at the bank to buy a money order to pay a bill.
So we narrowed our envelopes to non-bill expenses, with the exception of our water bill, which can only be paid in cash.
2. Filling the Envelopes Based on Your Paycheck
Not everyone gets their whole month's worth of income at the first of the month in one lump sum. If we did, it would make the envelope system pretty easy.
We also don't get bills on the same day each month.
And of course, some bills vary, and some paychecks vary.
Each week was a mess of deciding how much of this check to cash out and put in an envelope. Or should it be next week's? Or does it matter?
Since my husband's paycheck could often vary, (like bad weather shutting down work for a day or so) we had to worry a lot about how to break down the checks to make sure the money was there to cover a short week that might occur.
If your income is erratic, the cash only system can be frantic. Its a lot of work, and it takes all the geeky fun out of personal finance.
3. Getting the Exact Cash Amounts
Yes. You can round up to the nearest dollar. You don't have to cash out exactly $21.37 for a category.
But the bank is still going to hate you when you come in every week and ask for all of those perfectly divided bills. (My sister is a bank teller, so I know this to be truth.)
I've read about people doing just that with the envelope system. Instead of cashing out the entire paycheck, they ask for several exact amounts in particular bill combinations.
Its not much fun for you either. Or the people behind you.
And there is always that creepy person watching you too closely as you leave with all that perfectly sorted cash, because you are probably going to attract more attention than other customers.
4. We Lost Money
This was absolutely human error. Still, it can happen to any human (maybe not this exact booboo, though.)
My husband ran the errands one week and absolutely mailed off one of the money envelopes.
He was on his way back to work, which was over 200 miles away, and was trying to get ahead of an ice storm. He had to leave earlier than usual, and neither of us was paying close enough attention when we were throwing stuff together.
We tried to track it down, but it mysteriously disappeared off the radar once it dropped into the post-office mailbox hole of doom.
Its kinda funny now, and I'm sure the odds are against it happening to you. BUT...it did make us think about the many ways we could lose cash.
Depending on how tight your budget is, losing some or all of a month's income could be devastating. Just losing a small sum was pretty annoying.
If you DO decide to use the envelope system, I really suggest that you buy or make colored envelopes or folders so they are a bit more obvious.
5. Dealing With the Change
When you are very good with your spending, sometimes you come out a little ahead at the end of the month. And that is fabulous! I know when that happens you feel like a million bucks.
But what should you do with your spare change? I've seen several ideas:
- Keep it in the envelope for next month (which sounds heavy and annoying)
- Throw it in a jar
- Take it to the bank and put it in savings
- Pay it toward a debt
Of course, all of these are great ideas. We were using our spare change to pay of small debts. So that meant trucking a few dollars of change 25 miles away to the bank where it could be added to the payoff fund.
Having change laying around isn't a bad thing. Once it builds up though, you want to have a plan, or things can quickly get disorganized.
In this case, I recommend having a large change jar for the surplus, and either rolling the change as it builds up, or taking it to the bank once it starts to look heavy.
Things to Think About
I'm not going to say that the envelope system won't work for you. It's really a sound idea, depending on your circumstances and lifestyle, and it does make you think more about your purchases.
We gave it four months. I figured that was long enough to realize it did not work for us. But during those four months, I did learn a few things you might find helpful:
- Cash is best for "fun money", such as makeup, clothes, toys, movies, etc. Once its gone, its gone. You can't swipe a card and remind yourself to cover it later.
- A cash envelope is excellent for a short term savings goal, such as a piece of furniture or a road trip. Being able to see the money building up is great incentive to save more.
- Cash is not good for groceries. I know some people are very strict with this, but I find that prices and kid appetites are just too unstable to set a very strict budget.
We had one episode where we bought the usual amount of groceries, but a fluctuation in price left us short at the checkout, and we had to hold up the line while we returned stuff.
- Cash works okay for household goods, as long as you give yourself breathing room. You don't want to have "just enough", then realize you forgot something important like toilet paper.
Also, household goods have changing prices too, and if you aren't prepared with a little extra cash or some coupons, you may have to do without or swipe your card.
- When something unusual occurs, you need to decide where that money comes from. Is it a household expense or does it come from your emergency fund? Can it be covered from your spending money or another envelope?
(For example: our daughter broke the nursery window. This was a house expense. Or an emergency expense. Or it could have been considered a "DIY" thing. If you aren't sure, then you have to worry about jockeying money from one envelope to the next to cover everything.)
- You may want to keep a small emergency fund envelope for times when you need something like cold medicine or wiper blades. Or windows.
Unless you are super organized and already have special envelopes for such things.
Cash Or Bank Account? How Do You Save?
We tried the envelope system. For us, it was stressful, chaotic, and full of obstacles.
But more importantly, it didn't save us any more money than what we were already saving, which is what it is supposed to do. We stayed right on budget before and after the system, with the exception of emergency incidents, which are problematic no matter what system you use!
We opted to stick with a combination of cash and bank accounts.
But I am curious. Have you used the cash system? Did it work for you?