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Better than Grandma’s Cash Envelope System

The cash envelope system has been a budgeting tool for a long time. I have clients who tell stories of their grandparents using the system to make sure they had enough money for all necessities like groceries, gas, restaurants, and entertainment. While this system still works, there’s a new way to use the cash envelope system.

The Old Cash Envelope System

When your personal finances are organized within a budget, each dollar has a job. Mortgage or rent, utilities, and car payment are the primary fixed and recurring monthly payments. These can typically be paid through your bank’s bill pay while other expenses like gas and groceries are paid using cash.

Under the old cash envelope system my clients withdraw a designated amount of cash, placing it in envelopes for use during that pay period. The envelope marked groceries is used solely for that purpose. If there is money left over, clients have the choice to leave it in the envelope for a month when they might have a bigger grocery bill or they can use the cash for something else.

At some point in their financial journey, a lot of clients are so dialed into their cash needs that they ditch the envelopes and have one large envelope for all items they should be spending cash on.  Groceries, eating out, coffee, etc. We know this works for our family because some weeks we are really good.  We grocery shop on Sunday, meal prep, pack our lunches, eat leftovers and don’t eat out.  Other weeks we are super busy, maybe sick, exhausted and don’t really have the time or energy to cook.  Those weeks we still use our cash but it’s not a problem because we didn’t go buy groceries that week.  It evens itself out, just as if you were using the envelopes and start robbing from Peter to pay Paul from one envelope to another.  For a lot of people, psychologically and emotionally, it doesn’t matter where the cash comes from because it’s so tangible you can still hold yourself accountable.

Other times, people worry that if they have cash they will spend it on anything. That’s why we designate different envelopes. Others don’t want to have a lot of cash at home and opt for the new cash envelope system but don’t discount the old cash envelope system if that’s what works for you.

The New Cash Envelope System

Rather than having cash and envelopes, clients opt for designated savings accounts. It’s the same as using cash but your “envelopes” are savings accounts. They transfer money to their checking account to use debit when they buy gas or groceries. The trick is to make sure they know and are sticking to the budgeted amount. The new cash envelope system also allows for making online purchases using cash from savings.

Clients open multiple savings accounts with a bank of their choice. We recommend CapitalOne 360 or Ally but you can use whatever works best for you. These online only savings accounts are almost too good to be true but I promise they are great.  They have no fees, no minimum balance requirements, link directly to your checking account, you can create an unlimited number of savings accounts, name them whatever you want and the interest rates are better than traditional bricks and mortar banks.  The one downfall is that it can take between two and five days to transfer you money from the savings account back into your checking account.

Each account has a designation — groceries, gas, travel, wedding, car repair, new car, emergency fund. Their budget designates specific monthly deposit amounts into these accounts.

Whether you choose the old or new cash envelope system, we want your money working for you! If you’re interested in learning more about personal budgeting, schedule a Eureka Session!