Budgeting with cash: How to make the envelope method work in 2018

If you're trying to get out of credit card debt, managing your money the old-fashioned way is what money expert Clark Howard has been recommending for years.

We’ve all read the studies that say people spend more when they pay with plastic instead of cash. Is that really true?

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How to budget with the cash envelope system

I decided to test out a cash-only budget for an entire month using the envelope method, but I’ve made a few simple tweaks to make the system easier to follow in a digital world.

Let me be clear: There’s nothing wrong with the old-fashioned way! I just wanted to make it more practical.

For years, I’ve put nearly all of my expenses on credit cards for the rewards (groceries, restaurants, clothing, gas) and pay off the balance monthly, so switching to cash has been an adjustment.

Here’s the 7-step plan I’m following to make budgeting with cash work in 2018:

1. Stop using credit cards

The first thing I did was freeze all but one of my credit cards to limit the temptation to use them! I put the cards in a Ziploc bag, submerged the bag in a bowl of water and stuck it in the freezer.

If this seems a bit too extreme, stash the cards somewhere else — just don’t leave them in your wallet!

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2. Make a list of expenses 

Next, make a list of where your money is going. I use two online budgeting tools to track my spending (Mint and Personal Capital), so all I had to do was log in to see a list of my major expenses.

Don’t worry about separating fixed and variable expenses for this step. Just jot down your budget categories!

3. Decide which categories are best for cash spending

Now that you have a list of your budget categories, you want to identify the ones where you think you have the most room for improvement. What are you wasting money on?

For this challenge, I narrowed it down to just three variable spending categories that I’ll be managing with cash:

  • Food and dining
  • Clothing
  • Miscellaneous shopping

I left out transportation because I don’t overspend on gas and paying with a card is much more convenient.

The crossed-out expenses represent budget categories that I’m already doing a pretty good job of managing, and I put stars next to expenses that I may want to focus on in the future.

Fixed expenses like mortgage/rent, utilities and insurance policies can stay on autopay — don’t touch those!

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4. Get out those envelopes! 

Here are the envelopes for those three categories. I set a budget for each of them and went to the bank to get the cash, which my goal is to make last for two weeks.

Some people fill up their envelopes every week or every payday — it’s entirely up to you.

I wrote down the deposit amount on the back of each envelope, and I keep track of my spending using a note-taking app and the calculator on my smartphone.

You may prefer the low-tech way of listing your transactions on the back of the envelopes.

5. Include online spending in the cash budget

How do you shop online with a cash budget? Let me explain the workaround that I’ve been using.

In addition to my three envelopes filled with cash (food, clothing, miscellaneous), I have an envelope that says “Online” — but this one doesn’t start with any money in it.

For online purchases, I’ve decided to continue using the one credit card that I didn’t put in the freezer.

Immediately after shopping online, I take money from one of the cash envelopes and transfer it to the envelope for online spending so that I hold myself accountable for that purchase.

Here’s an example:

  1. Bought an electronic item online for $20
  2. Took $20 out of the "Miscellaneous Shopping" envelope
  3. Put the $20 into the "Online" envelope

You can then take the money from the “Online” envelope to your bank or use it to fund the other envelopes when it’s time to fill them back up.

Don’t like this idea? Some people will instead use prepaid cards or gift cards to shop online while on a cash budget.

RELATED: The one and only exception to Clark Howard’s ‘no gift card’ rule

6. Store cash envelopes in a secure place 

I don’t carry these envelopes full of cash everywhere I go. That just doesn’t seem safe. Before I make a trip to the store, I take out the money I’m going to need and leave the rest at home.

I’ve been storing the envelopes in a small container along with my receipts for the two-week period.

Update: There are no coins in these envelopes! I'm rounding up purchases to the nearest dollar to keep things simple. Loose change goes into a separate piggy bank.

7. Keep some ‘Forgot my envelope’ money

What happens if you forgot to take money out of your food envelope before heading to the grocery store? Turning the car around may not be the most realistic thing to do!

That’s why I keep $20 cash in my wallet no matter what, plus my credit card and debit card — only for the ATM.

I know that many people on cash budgets will think that’s cheating, but I disagree. I still use the card, which I pay off monthly, for the categories that aren’t part of my cash-only budget.

And if I end up using any of the “Forgot my envelope” money, I can replenish it as soon as I get home.

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Challenge results! 

I used this cash budgeting system for the past six weeks, refilling the envelopes every other week. I had $95 left in my envelopes after the first two weeks, $125 left after the second two weeks and $35 left after the third two weeks — $255 total.

Having to count out bills and hand them to a cashier really does make you think twice about impulse buys!

A few people on Clark’s Facebook page have said they’re reluctant to try this method because they’ll miss out on credit card rewards, but I’m not worried about that because I’m saving so much money.

If budgeting with cash reduces my spending by 10%, I’ll gladly give up the 2% cash back from my credit card company.

To recap, here’s my cash budgeting strategy: 

  • Use the envelope method for 3-5 variable spending categories
  • Make a plan for handling online shopping
  • Use a credit card for remaining expenses and pay it off monthly
  • Do nothing with fixed expenses already on autopay
  • Track every single cash transaction using a note-taking app
  • Keep $20 on hand at all times in case you forget your envelopes

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