How the Cash Budget System Works for Us


Is it hard for you to stick to a budget?

Are you constantly checking your account to see how much money is left until payday?

Do you spend money you don’t have?

If you answered yes to any of these questions, the cash budget system is going to change your life. Using cash for variable expenses – things like groceries, personal spending money and vacations – makes it impossible to overspend. (As long as you’re following the system.)

Before using cash, Mr. Right and I bought most items with our debit card. Even today, I don’t like using cards for a couple of reasons:

  • It’s easy to overspend. Who hasn’t been at the store and thought, “Well I’ll figure out how to cover it later?”
  • It’s easy to forget what you spend. You might overdraft your account or forget about a purchase until late in the month.
  • Your account could be hacked. This recently happened to us, which was annoying. Cash can’t be hacked.

How the cash budget system works

Each spending category gets a specific dollar amount of cash, which you take out from the bank and put into envelopes. (Note: Not every expense should be cash. Things like car insurance, your mortgage, water and heating bills are easily put on auto payment.) Here are the categories we go cash-only:
  • Personal spending money for myself, Mr. Right and the kids
  • Clothing
  • Haircuts
  • Vacations
  • Entertainment
  • Gifts
  • Eating out
  • Groceries

These categories make sense since it’s possible to eat frugally for a month, but not an option to default on the mortgage payment. Splurge on a set of these fabric cash envelopes. They are durable (paper falls apart) and perfectly sized.

How much cash goes into each envelope?

After you budget for the non-negotiable bills – like the mortgage, car insurance, etc. – use the leftover money for the cash budget. Decide how much to spend in each category and write it down. We use an excel file.
You can withdraw the money monthly, or every two weeks, like we do. It’s a bit more work, but I’m afraid we’d run out of money by the end of the month. Every other week is very doable.

Figuring out the cash

One of the most time consuming parts of the cash budget is withdrawing the cash so it matches the amounts in the envelope. For instance, we might budget $35 every two weeks for haircuts – that means I need to take out a $20 dollar bill, $10 dollar bill and $5 dollar bill when I go to the bank. It used to make my head spin trying to figure it out for eight categories.
Here’s what I do now to avoid that:
  1. Open the budget file (ours is a simple excel spreadsheet). This helps me remember which cash envelope I’m on for the next steps.
  2. On scrap paper, write the numbers: 50, 20, 10, 5 and 1 down the left side.
  3. Make tally marks on scrap paper for each amount. (If I need $320 for groceries, there will be 6 tally marks by “50” and 1 tally mark by “20.”) Continue to tally for each cash budget expense.
  4. Give teller my scrap paper when I withdraw funds and ask for the money back in those amounts.
  5. Divvy up the cash into envelopes.
Budgeting to the nearest 5, 10 or 20 will make this easier.

How to remember to take your cash

It’s hard to remember the envelopes at first. Keep trying. When you grocery shop, put your list in the cash envelope. If your money runs out, put items back (I have done this a few times). If the haircut fund is spent, wait two weeks to get a haircut. Cash makes it (at times – painfully) obvious how much money you can spend.

Try it: Commit to cash as a couple

Quit using debit or credit cards for purchases. If overspending is a big problem, agree to a month without using cards so the habit can form. If you are shopping and forget the envelope – turn around and get it. It can be a hassle, but it sure beats living in debt.

Have you tried the cash budget system?

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Photo by Adam Holtrop

Check out Arrows by Melissa Gorzelanczyk, coming January 2016 from Delacorte Press/Random House. Visit her author site here.


1 Brittnie (A Joy Renewed) August 30, 2011 at 4:46 am

My parents actually used this method starting in middle school when we were first given an allowance. We had different categories of envelopes and a set amount of cash per month to go in each envelope. My siblings and I each had our own set of envelopes and we were each responsibly for managing our monthly budget. If I needed shampoo and toothpaste it had to come out of my toiletries/personal care envelope, if I wanted to go to dinner and a movie with friends I had to pay for it with cash from my entertainment envelope. Once the money was gone we could not transfer it to another envelope and it was basically oh well! Wait until next month. (And don’t think they gave us an in sane amount of money because it was not at all). While we thought this was totally annoying as kids, it really did teach us some valuable and practical lessons on budget and overall money management.

2 Connie August 30, 2011 at 8:30 am

I think the cash system is the best thing! I still struggle with overspending regardless. However, the cash system has helped tremendously in that area. I think the other benefit is that it has made me cognizant of the many smaller expenses in our household budget. My favorite thing, for example, is when it’s time to buy a birthday gift. I already have money in the “gifts” envelope and don’t have to scramble to find cash to purchase something.

3 Kelsalynn August 30, 2011 at 10:48 am

I love this article! THANK YOU for simplifying the cash system! My husband and I do it and I recommend it to all my clients! But you say it so much better than me! 🙂

4 Julie @ The Family CEO September 2, 2011 at 11:07 am

We have never attempted the cash budget. But honestly? Those fabric cash envelopes are so cute I may be tempted to try just so I can buy those.

Great post. I’m going to link to it in my next Personal Finance Roundup.

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