In my last post, I talked about what a cash budget is and why you need one. I shared how it is the one thing I believe that has helped my husband and me on our journey to debt free living. We are on our way to our dream of financial freedom, and using a cash budget is what has made it possible. (I seriously might frame my little envelopes when we finally pay off our last loan!)
A few things you will need are a pen/pencil, access to your online bank account or previous statements, and envelopes. You can use any ol’ white envelope. BUT I love making things pretty! I used cute scrapbooking paper and printed off THESE envelopes from One Good Thing by Jillee.
Once these are printed off, you are ready to start your own cash budget system! Below are the steps I have taken every month to slowly but surely watch this dream become a reality.
1. Decide which categories in the budget will be cash. We use cash for fun money (my husband and I get a set amount each month), grocery money, eating out, household expenses, miscellaneous (hair cuts, school expenses, etc.). I also have an “extra” envelope. At the end of the month, if we have any cash left in any of the envelopes I put it in our extra fund and we use this on whatever we want. Sometimes we just blow it. Other times we save it for a bigger purchase that we want but don’t have room for in the budget.
2. Decide an amount for each category. This is something that will evolve and change in different seasons. You should have a general idea of how much money you spend in your categories. For more info on how I do that, see this post. If you have no idea, look over the past few months’ statements and get a rough average. If this is new to you, a rough average that could be a good starting point for you is about $120 a week for groceries, maybe $50 a week eating out, $30-40 for household expenses, and about $80 for miscellaneous expenses.
These are very rough estimates. You might spend way more in some categories, and way less in other categories. You might live in the city, so you could have an envelope for cabs. Maybe you are single and going out is something you do a lot more than someone with multiple children. You would just have more in that category. After a while, you will learn to figure out what amounts work best for you!
I will tell you, we are VERY strict with our budget right now. We only spend $80 a week for groceries. That number includes household expenses like cleaning supplies, toilet paper, things for the home, etc. We only eat out once or twice a month! And our miscellaneous fund is $200 for the whole month. Our miscellaneous fund should really be called our “everything else” fund. We pull from that envelope to pay for oil changes on both cars, haircuts for all four of us, school supplies, yearbooks, school pictures, field trips, clothing needs, shoes, birthday gifts. Literally everything else. We make that $200 s-t-r-e-t-c-h!
We also take out $60 a month for family fun days. Once a month or so, we take a special family day and splurge. The cost is worth the memories! In the Fall, we visit an apple orchard and pick our own apples, then eat at their little cafe. In the Summer, we go to a drive-in movie theatre and have dinner there. We also do things every once in a while like go to the Children’s Museum, movies, bowling, mini-golf. None of these are insanely expensive in and of themselves, but doing them all the time would add up.
3. Withdraw the cash from the bank. I think this one is self-explanatory. I keep my amounts in $20 increments so I can always do the drive-through and not waste time going in and standing in line for a teller. Figure out how much total you need to withdraw and take it out.
4. Place the specified amount for each category in an envelope. Divvy up the total amount of cash into the different categories, and place each amount in a separate envelope. Or, if you want to get really fancy. You can use this wallet that is made specifically for a cash budget system.
5. Label each envelope and write the total at the top. Now you know exactly how much you have in each category.
6. For each purchase in that category, use the cash from the envelope to pay, subtract the amount spent from the original total and write the new total on the envelope. For example, I go to the grocery store once a week. When I pay, I hand them the money and write my totals right then and there. I subtract the amount I spent from the total amount that I started with right on the envelope. If I spent $65, I know $80 – $65= $15. I have $15 left in case I need to make a quick run back to the store for anything. At the end of the week, if I haven’t spent that $15, it goes into my “extra” envelope.
7. Commit to this for at least three months. It will take a couple of months to get in a good rhythm. You will need to tweak your amounts in some categories.
8. Give yourself grace!!! It will take a while to get in the swing of things, especially if you are new to budgeting over all. You will probably run out of money in some envelopes, especially at first. This is to be expected as you figure out a good amount for each envelope. Just borrow from other envelopes until you smooth out these little kinks. Know that this is a good problem. You are learning to better steward what you have. It will get easier!
Don’t be discouraged if you feel like you are re-working the numbers every month. After a while, you will know how much goes where. And you will wonder how you ever let yourself lose so much money before by not knowing exactly what you were spending and sticking to your budgeted amounts.
9. Watch your goals come true!! If you commit to this, and if you are mindful of where you are spending your money and strategically using your extra money to pay down debt or build up savings or whatever other goals you have, you WILL watch your financial goals become reality.
If you are willing to give a cash budget a try, let us know in the comments so we can encourage you along the way! Does anyone else have tips or tricks for those who are new to setting up a cash budget?