Tips for Budgeting With Cash That Really Work

If you’re looking to save money, pay down debt, or just finally get your finances on track, the best place to start is by building a budget. But if you’re struggling to stick to a budget, you might want to consider using cash budgeting methods instead.

Parting with cash is harder than parting with digital money, Anvi M. Shah, an assistant marketing professor at the University of Toronto Scarborough, told the New York Times. That’s because cash is tangible. It’s more difficult to overspend when you can physically see your available money decreasing.

Paying with cash may not be as convenient as using your card, but it can help you develop healthy budgeting skills. If you want to try budgeting with cash, here’s everything you need to know to get started.

What does it mean to budget with cash?

Budgeting with cash is as straightforward as it sounds. You’ll create a budget that allows you to better manage your monthly expenses based on your income. What’s different about budgeting with cash is that when you get paid, you’ll opt for a paycheque, which you can cash or withdraw money from your account. Then, you’ll use your cash to manage your expenses.

How does budgeting with cash work?

There are many ways to budget with cash, but the general principle is to use cash to pay for all of your expenses, from rent to groceries. The idea behind cash budgeting is that it’s harder to part with physical money, so it will be more difficult to overspend.

You can follow any of the cash budgeting techniques, but the most popular one is the cash envelope or cash stuffing method. It’s an easy way to step into managing your budget with cash and can easily translate into digital money management once you’ve mastered this budgeting technique.

How the cash stuffing method can help you save money

The cash stuffing method is the best way for beginners to start budgeting with cash. When employed successfully, cash stuffing allows you to designate set amounts for different spending categories and savings goals to help you cut down on overspending.

Here’s how the cash stuffing method, also known as the cash envelopes method, works.

1. Create your budget

Like any cash management plan, you’ll start the envelope budgeting system by building a budget. To do this, you can use a budgeting app or budgeting spreadsheet templates, or you can create them by hand. You’ll want to review your previous bank statements to figure out if your monthly spending is where you want it to be.

For example, if you bring home $4,000 every month but spend $4,500, you’ll need to find somewhere to cut back on your monthly spending. Examine nonessential categories like takeout, entertainment, restaurants, and travel to see if you can cut back to put more money toward building your savings.

Not sure where to start? The 50/30/20 budgeting rule is a great method for beginners. This rule determines that 50% of your monthly income should go to essential purchases, 30% to nonessential spending, and 20% to savings goals. You can adjust the percentages as needed to account for your specific monthly expenses.

Decide on envelope categories

The next step in the cash-stuffing budgeting method is determining how much you usually spend in set categories and creating new budgeting amounts.

Your exact categories will vary, but here are a few that apply to most people:

• Rent or mortgage

• Bills (electric, gas, cell phone, water)

• Debt payments (credit cards, loans, medical bills, car payments)

• Groceries

• Gas

• Insurance (health, home, renters, auto)

• Restaurants

• Clothes or nonessential shopping

• Savings

Feel free to add or pare back from this list of spending categories. The goal is to determine where your money is going and then look at your monthly income to determine where you can cut back on your spending. Ideally, you want to end up with a budget surplus or more money left over each month that you can apply to debt or savings goals.

Once you’ve figured out how much you can spend in each category to stay on budget, look at your pay schedule to determine how much you’ll put into each envelope weekly or biweekly.

Prepare your envelopes

Now that you have your budget and monthly spending categories, you’ll need to create envelopes and label them accordingly. You may want to colour code your envelopes to make them easy to find.

You can use a Sharpie or printed label to help identify each envelope, and you may also want to put the total monthly amount that will be stashed into the envelope. If you’re married or in a relationship, agree on a safe place to keep the envelopes so your significant other always knows where the money for each expense is. This will help you stick to the envelope budgeting method.

Stuff your envelopes each payday

They don’t call it the cash-stuffing method for no reason. It’s time to act on the heart of this budgeting technique and start stuffing your envelopes with cash.

Add more money to your envelopes every time you get paid, following the schedule you’ve created during the categories step. If you have a partner, they should do the same thing.

This can be a bit trickier if your income is irregular, but it’s not impossible. Treat your first month as a trial month so that you can learn what works and doesn’t work for your finances.

Spend only what’s in your envelopes

What is the most important part of the cash-stuffing budgeting method? Only spend what’s in your envelopes. Don’t dip into your savings or another envelope unless you absolutely have to. This will keep you disciplined and prevent you from overspending.

If you can’t pay everything in cash, like your rent, mortgage, or utility bills, it’s okay to leave this money in a bank account as if they were in digital envelopes. You want to ensure you don’t touch these funds for other reasons throughout the month.

Adjust over time

You likely won’t get your budget 100% right the first month you implement it — and that’s okay. Learn as you go and make adjustments to ensure the cash envelopes system works better for you.

Need to change some of your category percentages? No problem. Realize you miscalculated a specific financial goal and reconfigure your budget.

It’s more important that you continue practicing budgeting than worrying about getting the numbers exactly right. You’ll likely find ways to improve and cut down on your spending every month, so make those adjustments and move forward.

Can you use the cash envelopes method digitally?

Yes, it’s possible to implement the cash envelopes method digitally rather than using cash. However, you may want to start with the cash strategy since it can be helpful to deal with tangible money when you’re just starting out.

But if managing cash isn’t realistic for you or you’re already disciplined and want to start budgeting from your bank account, there are a couple of ways to implement the cash stuffing system online.

Some bank accounts let you organize your money into different savings buckets so you can categorize your goals just like you would with physical cash envelopes. If your bank doesn’t offer this option, you might open multiple bank accounts to serve as digital envelopes.

Of course, managing numerous bank accounts can be overwhelming. A budgeting app that implements the cash envelope system may offer a happy medium. You’ll be able to label your expenses with digital envelopes but can keep all of your money in one chequing account.

What savings account should I use to budget with cash?

You want to include a savings goal in your cash budget, even if you can only afford to save a small amount each month. While you can keep your savings in cash, it’s generally not recommended. Storing your savings in a high-interest savings account is better, because your money will be protected and can also earn a competitive interest rate.

To make automated savings a part of your cash envelope system, simply have your savings moved from your bank account on the day you get paid into a separate savings account. If you think you’ll ever need to access your account with a debit card or virtual card, consider an alternative savings account, like KOHO’s combined spending and savings account. This account offers up to 5% back on your savings, comes with overdraft protection coverage, and is CDIC-insured. Plus, KOHO also provides a variety of credit-building tools, like access to your free credit score, to keep you financially healthy in every aspect of your life.

Consider other types of savings accounts as well, like a tax-free savings account or investment account, depending on your personal finance goals.

How do you get cash from an online bank?

If you’re paid electronically and don’t want to change that, you can implement the envelope budgeting method by withdrawing what you need in cash from your bank. You can typically do this at an ATM with your debit card. But if your bank offers physical branches, you can withdraw cash in person.

If your bank account doesn’t allow ATM withdrawals or you find it challenging to get access to your money, transfer your funds to a bank account with easier access.

If you’re paid by cheque, make sure you can cash your cheque online and easily access the cash in-branch or at an ATM.

Can you deposit cash at an online bank?

Yes, many online banks in Canada allow you to deposit cash at an ATM. And some online banks partner with big banks to make cash deposits a little easier. However, not every online bank offers this service.

If depositing cash is important for you to follow the envelope budgeting system, make sure you have an account at a bank that offers this option. Otherwise, you might need to find a different financial institution that will make maintaining the envelope budgeting system a little easier.

Are there alternatives to the envelope budgeting method?

If cash stuffing isn’t working out for you or if it’s difficult to maintain, try the envelope system online. If you’re still struggling, you can try another budgeting system, like the “pay yourself first” method or the zero-budgeting plan.

The cash envelope budgeting system won’t work for everyone. If you need help coming up with the right personal finance plan for your money, reach out to a financial advisor or money management expert.