I’ve been using the cash and envelope system for years. As much as I talk about it, I know many people still don’t believe in this method. In fact, I still hear some of the same excuses such as:
“I tried it and it did not work for me”
“I overspend when I have cash”
Honestly – I get it. I use to be one of those who thought the same way.
When we started our journey to get out of debt, one of the first things my husband said we needed to do was switch from debit to cash. I was not a happy camper. I just knew that we would fail because I would spend every penny before I knew it.
However, because I also knew what I had been doing all along was not working, I figured it was worth a shot. However, in the back of my mind I just knew I was going to get to prove my husband wrong. But, the reality is, that he was right (oh how I hate to admit that).
The truth is that I did not want to use cash because I did not know how to do so correctly. When I started out, I had no idea how much of a difference it would make. I did not understand how using cash would make me more accountable to myself and actually save me money.
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THERE IS EMOTION TIED TO CASH
If you are like my husband and I, you have worked very hard to create your budget. You may be in the same situation as us and are trying to dig yourself out from your debt. However, you could be past that stage and trying to build wealth.
No matter your financial situation, your budget still includes amounts for groceries, fuel, clothing, etc. That is just how a budget works. Believe it or not, when you use cash for some of these items, you really think about the purchase a bit more.
When you swipe your debt or credit card, it’s easy. You don’t even have to think about it. However, when you have to hand over your cash, it hurts. You only have a limited amount of cash, so you think twice about each and every purchase.
Not only that, but when you use cash, you feel the pain of paying for something. Swiping your card for $150 in groceries is not fun, but you don’t think much about it. However, pulling out $150 in cash and handing it to the cashier is more real. You see the money leaving your hands.
CASH PREVENTS OVERSPENDING
Spending cash is not just emotional. It actually prevents overspending. It is impossible to spend more than you need to.
If you have $100 to spend, there is no way you can spend $101. You don’t have that extra $1. However, if you have plastic and go over your budget by even $2 – $3, you will still buy.
Cash saves you money.
Here is an example. Let’s say that you exceed your budget by only $15 a week at the grocery store. That sure doesn’t sound like much, does it. However, add that up over the course of a year and you’ll have spend an additional $780!! Just imagine what you could do if you had another $780!!
YOU TRACK WHERE YOU SPEND
The other reason people say they do not like to use cash is that they spend it and don’t even see where it goes. The reason is simple. Tracking. When you use cash — in the right way — you need to account for it.
When you spend money, you absolutely must write it down. This helps you not only know exactly how much money you have left to spend, but can also help you learn your spending trends.
You’ve probably heard that if you are going on a diet, you should write down what you eat to see where you can cut back and see your eating patterns in writing. The same is true for spending. You MUST write it down. This forces you to be accountable – yourself – for your spending.
You must also divide your spending into individual envelopes. You need to keep only one envelope for your groceries and another for clothing. That way, you don’t end up going on a huge fashion shopping splurge and now, there is no money left for dinner.
Instead, you have limited funds to spend and you really thing before you spend. When you use envelopes, you are accountable to that envelope. That makes you accountable to yourself.
If groceries reads $300 for the next two weeks, you have to be accountable to that envelope to ensure that you do not overspend. Again, it just takes time for you to learn how to do this.
This entire change in the way you look at money is a process. You didn’t go into debt overnight, so you can’t expect to change your spending habits and the way you look at money to change overnight. It will not even happen in one, two or even three months.
You have to give yourself a chance to re-teach yourself how to handle your finances.
When you use a cash budget, you become accountable for every penny you spend. You think twice before making each purchase. The result is often less spending and saving more money.