Ever heard of the Cash Envelope System for managing your household money and budgeting?
If you haven’t don’t worry, I’m going to teach you how to use it but a more up to date version that could really make a difference to managing your money flow and balances each month.
It was first made famous by Dave Ramsey and a basic system with the simple idea of budgeting by putting your cash into actual envelopes and, gasp, when the money runs out then you are done till next pay cheque.
The great thing about the cash envelope system is it’s simple to understand and use, but also you have physical boundaries on your money that should force you to not overspend.
// What is the Cash Envelope System?
In Dave Ramsey’s original cash envelope system back in 2010, the whole concept was to physically take out the money you wanted to dedicate to a particular spending account, such as food money, and place it in an envelope at the start of the month.
As you went along your shopping for example, you deducted the cold hard cash from your envelope, and it forced you to manage your money down to the last detail each shopping purchase.
However, living in the electronic age now where I can get instant access to my banking account amounts 24/7 I constructed a modern electronic cash envelope system and it is the one I have been using with my own family budgeting for years.
// The Basics of my Electronic Cash Envelope System and How it Works
I don’t have as many accounts to separate our money as Dave suggests, but here is the basic outline.
Each pay check automatically (as you know we want everything on AutoPilot here on mamafurfur.com and when it is automatic it means we don’t need to stress or worry about it) my planned budget for these budgets is transferred from our Main incomes account.
I then remember to use the correct account debit card for that related bucket of money for the type of purchase I’m making during the money, and I can check my balance daily on my banking app to see and plan for how much money I have left over.
// The separate accounts I use for my family
I have the following accounts in our name for our budget:
- Main current account – all our household essential bills and our wages go straight to this account. It is the central location for everything to do with keeping the lights on and all of our essential bills come out on the first of each month straight away. This means with all the bills taken care of right away, if there is any money left over we can place it into savings.
- Food and Petrol account – using my AutoPilot Money system, our next major spending need tends to be food and travel money. Having this in a separate account means I can quickly and easily see how to balance for the remaining month and whether I really need to do a big food shop or just a quick top up.
- Personal Pocket Fun Money – You may think it is funny to pay ourselves pocket money each month as working grown adults, but for our family it works. Each month we receive an amount into our separate bank accounts that is purely to spend as we see fit and have fun with. No questions asked. This means our own spending habits are kept away from our financial goals and household spending, and we are each responsible for managing those accounts each month.
- Family Fun Money – similarly each month the family receives money to do whatever we would like that month with. Having a little pocket of money, knowing we have saved already in the month, means we can enjoy fun activities and plan for the month ahead without trying to balance the books as we go along.
- Short Term Savings – another direct debit saving account for us is our Short term saving goals. At the start of each month a fixed amount is moved over to this account, and this money is to plan and cover yearly expenses for the house and cars, but also to be our savings for home improvements and holidays for the year.
- Christmas and Birthday savings – I find having one account completely separate for this purpose helps us budget better for this family event throughout the year. Christmas never puts us into debt and we also make sure we have enough in this account to have gifts and activities planned for our family during that special time of year. Same goes for Birthdays being taken care of and no big surprises.
- Investments – Should we have any money left over at the end of the month, I have a separate account to move money across as a holding area until we wish to deposit it into our investments. We work on what is called a Zero Budget scheme so every pound earnt is used and accounted for at the beginning of the month and end.
- Emergency Fund – We hold £1000 as an emergency fund currently, although with credit cards we in theory have access to far more quickly if we need it. This money is there never to be touched but should we ever need a very quick turnaround for cash.
// Is it difficult to put this system into place?
When you are first developing new spending habits, deciding what you are going to spend before the month can be game changer for most.
The vast majority of people look back, if they even look at all, and try and figure out where their money went.
By just deciding where you actually want your money to go is a great place to start and my electronic cash envelope system used with the AutoPilot Money approach I developed works for our family to do just that. Once you know how much you want to spend for every category setting up new buckets (new accounts) for that money isn’t hard and makes money management during the month a no brainer.
If the money is low in one account, you have to wait until next pay cheque to spend some more in that category.
By setting financial goals for your year or short term ahead, this process will be even easier as you know what you want to achieve with your money in the future too.
// Why do I manage my money like this?
My family and I are working towards complete financial freedom and security – we want to know that our investments and savings allow for us to live off the profits, and not be in debt for anything.
We want our net worth to be as high as it can be!
With this system, it allows me to keep a grasp on potential over-spends each month and also allow us the freedom to spend and live a full life, as we know in the background we have taken care already of the essential savings and investments we need in place to make our goal a reality.
Ultimately remember this phrase…..