A cash-only budgeting system can be the ticket to reining in spending and getting away from the temptation of credit cards. The idea is this:
- Pull out the total of your weekly (biweekly, monthly) budget in cash.
- Separate the cash into envelopes by category according to how you're budgeting that money.
- Spend down the envelopes as you buy things.
- Re-budget by transferring money from one envelope to another (no free lunches!)
- Re-fund the envelopes at the beginning of the next budget period, re-evaluating as necessary.
This cash-only system is straightforward. It doesn't use credit cards, and therefore greatly reduces the temptation to overspend. It doesn't even use debit cards, which can trigger a lot of fees if you get too close to the bone and start incurring overdraft or non-sufficient funds fees. Of course, you can always go to the ATM to get more cash, but that takes effort — possibly enough effort to get you to think twice about doing it. That's the main advantage of the cash-only system: it restrains you.
The main disadvantage, of course, is that you don't have the convenience of electronic payments in a pure cash system. Buying online is a transaction that can't be fulfilled directly from an cash envelope system. It's hard to stuff a $20 bill into your modem and send it to Amazon.
This question over at the Personal Finance and Money Stack Exchange site was asked by Alex B:
Using a cash budget, say we save $100 for household items.
Typically, we would withdraw $100 from the ATM, put it in an envelope, and then later, go to home depot or walmart or wherever and buy an item for $20.
Now I want to buy one item from Amazon.com (or anywhere online).
What is the best way to handle this? Do I go re-deposit the cash? Do I leave money in my bank account in case I need to buy something online?
I'm looking for strategies to track that $100 and be able to buy items online.
It's a good question. Shopping online often gives much better deals than going to a brick-and-mortar. Specifically, though, a cash-only system makes these kinds of purchases a pain, almost by design.
My suggestion around this is to create another envelope called “Online” and pay that envelope from the other envelopes as online purchases are made. It works like this. All envelopes except the Online envelope are funded normally. The Online envelope starts the budget period with nothing:
As online purchases are made, the money for the purchase is taken from the appropriate budget envelope and put into the Online envelope. As an example, let's say that we went to eBay and bought a 4-CD set for $12. We buy the CDs with the checking account that is used to fund the envelopes. This is classified as “Fun Stuff” so we'd take $12 out of the Fun Stuff envelope and put it into the Online envelope:
We have tracking! The proper envelope was “debited” and we know by how much. The way to balance things out in this example is either (a) withdraw $12 less from the bank account the next time around and use that withdrawal plus the money in the Online envelope to fund the other envelopes normally, or (b) take the money in the Online envelope back to the bank, and re-deposit it.
One thing you may have noticed already is that there's a danger in overspending the checking account. That's the price that's paid for allowing online transactions into what should be a cash-only system. The $12 transaction is on its way out of the linked checking account, immediately. It won't wait for the next time the envelopes are funded.
So, do you wait until the next funding cycle, or re-deposit the money? That depends on how much cushion is in the checking account. If there isn't much cushion, you should take the cash back to the bank so that you don't overdraw the account. (If there's no cushion, you probably shouldn't be doing online purchases at all with this system.) If you have plenty of cushion, you can wait until the next funding cycle to zero out the Online envelope.
So there you have it: a how-to on hacking a cash-only system to include the field of deals that is the Internet.
(Thanks to Budgeting in the Fun Stuff for including this post in the Totally Money Blog Carnival.)
I’m on an envelope budget as well and I usually just take the cash back to the bank. It usually occurs when I find a deal on Groupon and want to purchase an evening of entertainment. I use my checking account reserve and then refill it the next time I am at the bank.
I’ve always wondered how much I’d save if I paid in cash… but I just hate carrying cash around with me all the time. But I bet I spent way more in ‘extras’ that add up on a creditcard when you don’t notice it.
A more techy method of doing the envelope system is the computer software program called YouNeedABudget (or YNAB: http://www.youneedabudget.com). I’ve been using it for 3 years now and am in no way affiliated with the company. Whether you’ve spent money online, in a store, with cash, from a credit card, to a friend, or some other way, it’s reflected in your virtual envelopes (the budget). Happy Budgeting, whatever way you do it!