The Cash Budget: My Spin on The Envelope System

Many personal finance podcasts advise to keep a cash budget for groceries and entertainment for the month. There is an envelope method and when the cash runs out for that particular category, there is no more spending in that category for the rest of the month. The idea behind this is that spending actual cash hurts, whereas swiping a card is kind of mindless. I find this to be true. When you pay for cash you need to know exactly how much it is so that you can count out the bills and be there mentally to make sure you get the correct change back. When I swipe my card, I’m not even listening to what the cashier says my total is!

But how do you know how much money to put in your Cash Budget for a category? I have heard advisors say to review your bank account for the past year, or you could do 1 month or 3 months to get an idea of what you spend in each category. If you do one year, you would divide your category by 12 to come up with your monthly budget for that category. If you did a 3 month history, you would divide the category by 3, and so and so forth. When you have your monthly spending amounts totaled you should reduce it a little (we are trying to save money, right?) and there you have it: your one month Cash Budget.

I am using a newer budgeting software tool to help me with this called Tiller, which costs $5 per month. Here I can categorize all of my automatically imported bank transactions in to predetermined categories, or categories I can name myself (like Date Night and Snacks). I can then look up each category’s detail to see the transactions and totals I have spent in any category in a certain time period: this week, this month, this year, etc. There are other budgeting tools that do this which I don’t have personal experience with. One is Mint and the other is EveryDollar.

The Cash Budget and Envelope Method sound great, however I am notorious for losing cash so the envelope system would not work out for me; I’d just drop the envelope somewhere and lose a thousand just like that! My solution is Raise. This is an app that allows you to buy gift cards either electronically or a physical gift card shipped by US Mail at a discount that can range from 0.5% to 25% and even more off the face value. There are also sales that appear in my email inbox pretty regularly that offer an additional 3% discount.

Here is my own personal example: I did a study on our bank account to look at what restaurants we visited from January 2016 – June 2016, tallied the total amount spent, reduced the total by 15%, and then divided by 6 months to come up with a monthly Cash Budget allowance for each restaurant. I happen to still have a note in my iPhone with these amounts.

Little Caesar’s $25/mo

Applebee’s $25/mo

Outback $10/mo

Taco Bell $40/mo (my husband went a little crazy with work lunches)

KFC $10/mo

Subway $75/mo (when my husband went on a Subway kick)

McDonald’s $25/mo

Burger King $10/mo

Wendy’s $20/mo

Bob Evan’s $30/mo

In our defense, this was before we started tracking exactly how much we were spending where. I now pack my husband’s lunches for him most days of the week.

Let’s look at what Raise is offering at the time of this writing for KFC: a physical $75 value gift card is being sold for $63 (a discount of 16%). Since our monthly KFC budget is $10 a month, $75 would get us through 8 months. If I bought this card today, 10/14/2016 I would write on the gift card “Good Through 06/2017” with a Sharpie. If we use up all of that gift card before June 30, 2017, there are no more KFC transactions allowed.

I have had a few fumbles with Raise so here are a couple of my fails: Yesterday we decided to have a Family Date Night and went to see Miss Peregrine’s Home for Peculiar Children (super cute!) and we went to Pizza Hut for dinner. Our local movie theater has a special matinee price for $5.75 and I thought it would be super smart to buy a $25 Fandango gift card at a 10% discount (I paid $22.50).  I went to complete my purchase on the Fandango website using my new gift card and saw a $5 “convenience” fee at the checkout! I quickly called up the theater and asked if I could use my gift card to pay in the store, but I couldn’t. I called Raise up to tell them I didn’t want this card anymore because I had just saved $2.50 to spend an extra $5 but I was told I could not return it because there was nothing actually wrong with the card (other than my failure to fully research before I clicked “Buy”). I thought ‘well other people are obviously selling their gift cards, I’ll just list it for sale!’ Sure, I could list it for sale for a 15% fee! I decided to just eat my $2.50 loss and not buy Fandango gift cards again.

I also had a brief stint when I went from a $50 a week grocery shopping cash budget to getting a $50 very slightly discounted Walmart electronic gift card (I’m talking 0.5 – 1.5% off the face value) which resulted in cashiers having to manually enter the gift card numbers and then waiting for a manager to approve the transaction. It was just not very convenient when the savings is usually less than $1. In addition I found myself straying from my $50/week budget if there was perhaps a $70 gift card at a 5% discount. I just wasn’t being as thoughtful with my grocery purchases so I have returned to the cash budget for that.

I hope you found this information useful. I have not been paid for any of my opinions on the apps and software I mentioned. Let me know if you decided to give any of these a try, or if you already use them!

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