The key to getting out of debt is controlling your spending. The best way to do this is by using cash. That is actually the next step to working yourself out of debt. We’ll discuss the envelope/cash system of spending below.
Before you proceed, it is important that you have already completed your Net Worth, Debt Snowball and Budget Forms. It may have been less than a good time, but it is important that all steps are completed so that you can ensure you are ready to move on with our next steps in helping you gain better control of your finances and work yourselves out of debt (or increase your savings account if you are already out of debt). Just make sure you have your budget handy as you move on to this next step – the Envelope / Cash System.
Cash is King!! I say this all of the time, but that is because it is something I truly believe in. I honestly disagree with the statement “If I have cash, I spend it far too easily.” It is in fact, the opposite. I find that because I use cash, I spend more wisely. When you have only $200 for groceries and you also know that your cash must last for 2 weeks, you really think twice before you buy that extra item. Of course, with couponing, you usually are able to save and spend less, which can help, but you still should always use cash.
The first thing to do is take a look at your budget. You should seriously consider using cash for the following items:
- Dining Out
- Hair Cuts/ Beauty
- Doctor Visits
- “BLOW” (which is your spend as you want – only if you can afford it)
- Doctor/Dentist Visits
You will notice that I didn’t include gasoline in my list. The reason I didn’t is that most people won’t overspend at the pump. Most of us just fill up our tanks and go about our merry way. You also don’t drive around and burn fuel or decide to fuel up because your neighbor did. This is a budgeted item, but not one where you might spend above your budget. Not only that, it is usually much more convenient to pay at the pump.
When it comes to an envelope system, you can purchase an envelope system as sold by Dave Ramsey or you can just use the envelopes in your desk drawer. Just note your categories on the outside of each one.
Next, you need to determine how much cash you need for each category each pay period. For example, if you are paid every two weeks, take the total monthly grocery budgeted amount and divide it by 2, to figure out how much grocery cash you need.
Go through each category you plan on paying for in cash and determine the amount you need. Then, figure up how many of each denomination of bill you will need and include a breakdown for the teller. Go to the bank and withdraw that total amount in cash and divide it into each envelope. Confused? LOL! No problem – here is an example:
100 Dining Out
MONTHLY BUDGET DIVIDED FOR BI-WEEKLY PAY
50 Dining Out
BREAKDOWN FOR EACH BUDGETED ITEM
Groceries: 14 – $20 bills 1 – $10 bill
Clothing: 2 – $20 bills 1 – $10 bill
Blow: 2 – $20 bills 1 – $10 bill
Doctor: 1 – $20 bill 1 – $5 bill
Medicine: 1 – $1 bill 1 – $5 bill
Dining Out: 2 – $20 bills 1 – $10 bill
SHEET TO GIVE TO TELLER WITH YOUR CHECK FOR CASH BACK
$1 bills – 1
$5 bills – 2
$10 bills – 4
$20 bills – 21
So, you have your cash is that all? Nope! Now that you have your cash in your envelopes, you will need to keep track of every. single. transaction. I am not joking. Doing this can help you stay on track and you also have to account for everything you spend. So, when you spend $20.17 at the grocery store, make sure to deduct that from your total. You can jot it down on the outside of the envelope, or keep a paper inside with the cash for you to use to track it.
Some of you may be disagreeing with me because you “get rewards on my credit card, so we do that and pay it off every month.” That may be the case, but you still are not in control of your spending. It is still very easy to spend and extra $50 at the grocery store. Most of the time you don’t even realize you have exceeded your budgeted amounts until the bill comes.
It isn’t completely about cash. It is learning self control. That is the one thing everyone will learn in going through this process. Cash enforces this.
You will quickly learn to love using cash and you will feel more in control of your finances. We’ve been doing this for so long that I don’t know how to shop without my envelopes! It is routine and it helps us always know, in a matter of minutes, how much money we have available for the things we need.
(I am not a financial advisor and the information listed within these posts is not to be construed a financial advice. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)