A Cash Budget

In the fall of 2005, my family was cash-strapped and looking for a way to control our money. At that time, I read a number of books by two authors: Mary Hunt and Dave Ramsey. Both of them discuss setting up and managing a budget.

Based on their suggestions, my wife and I decided to try managing our money by operating on a cash budget. We started by breaking down our household spending into distinct categories, and gave each category a separate envelope. On each envelope, we list four columns: Date, Description, Amount and Balance. Each time we add or remove money from the envelope we make a note and adjust the balance. That way, we can read the outside of the envelope and see how much is inside. To find out how much we should put in each envelope each month, we looked at past bank statements and made a guesstimate as to how much we should put into each category every month. At the beginning of every month we sum up the total for all of the envelopes, visit the bank, and withdraw those funds in cash.

Why spend cash? There are a number of reasons. First, studies show that people who spend cash in person spend 30% less than people who use debit or credit cards. Second, we know exactly how much we have to spend each month. For example, we have an entertainment category for movie rentals, restaurants, etc. At the end of the month, if there is any money left, we go out to eat. If the envelope is empty, we don't. This is how we stay on our budget. Many think of a budget as a restriction on their freedom. I see it as the opposite: I control my money instead of it controlling me. Third, I have far fewer concerns about ending up with a zero balance in my checking account the day before payday. Because we withdraw a lump sum in cash at the beginning of the month, there will only be a couple of debits, including utility bills and a mortgage payment, that will withdraw money from our checking account during the month.

Another reason our budget gives us freedom: My wife, my kids and myself each have our own budgeted category. In the past, I always felt guilty buying something for myself and I never knew my limits. I would also get slightly upset at my wife when she would buy something for herself, without first looking at the balance in our checking account. Now each of us has a monthly allowance – that we can save or spend.

The cash budget also helps in emergencies. For example, we have a category for auto maintenance and repairs. After a couple of months of putting deposits in the envelope, we have a couple of hundred dollars saved (in cash) specifically set aside for the time when the car needs to go to the shop for repairs. When paid from the auto maintenance and repairs budget category, a trip to the auto shop has zero impact on the rest of our budget categories.

Our cash budget also allows us to set aside or pro-rate our yearly bills, such as auto insurance. We pay our auto insurance once a year, and in past years we have had to take money out of savings to pay the entire bill. Now, we have taken last year's bill, and we put away 1/12 of the total bill each month. At the end of the year when it comes time to pay the bill, we now have the money available.

There are exceptions to the cash budget. Sometimes, while I'm on the way home from work, I may need to stop and get a couple of items from the grocery story. I may not have any cash from our grocery category with me, but I may stop anyway. I purchase only what I need with my debit card, and when I get home, I pull the amount that I spent on groceries out of the groceries and put it in another envelope labeled 'Deposits'. This envelope is a catch-all for purchases that were made with our debit card. At the beginning of the month, we look at the Deposits envelope, add that amount to the cash that is going to be distributed to each envelope, and subtract the amount from the total that we were going to withdraw in cash from our checking account. This way we stick to our cash budget, and at the beginning of the month we leave any money in our checking account that should stay there.

Since we implemented a cash budget, we have been able to take control of our finances. It has allowed us to stop living paycheck to paycheck. We have gained peace of mind, knowing that we can pay our bills and still have money left at the end of the month. If I've convinced you to start living on a budget, I'd like to know if you have any questions or comments. Please leave feedback below.