Cash Envelope System UK – How to Get Out of Debt

A budget is an excellent tool for helping you keep track of your finances if done correctly. Many people spend more than they earn. As such, they end up eating up their savings and building up debts.

When you spend more than you earn, it leads to severe problems and a debt spiral. This is why budgeting is critical. One of the best budgeting methods is the Cash Envelope System. Want to learn more about this system of budgeting? Keep reading!

What is the Cash Envelope System?

The Cash Envelope System is a budgeting method that helps you track your spending by keeping cash in separate envelopes. This system also enables you to control of how much you spend by making sure you only take cash out for the budgeted amount.

Just like the 7 Baby Steps, the Cash Envelope System is the brainchild of Dave Ramsey. More than two decades ago, Dave Ramsey was fighting his way through millions of dollars of debt. After overcoming bankruptcy, Dave began teaching people ways of handling money. This includes budgeting.

By following the Cash Envelope System, you will not overspend in a particular category. The average UK household spends £588 per week, £2,548 a month and £30,571 a year to cover living expenses. This is generally based on an average of 2.4 people per household.

If you’re constantly overspending, use this system. Just take 5 or more envelopes and label them – food, entertainment, utility bills and fuel. Take cash out that you budgeted for food and stick it in the “food” envelope. When you shop for food, you only use that envelope.

Once the money is gone, that’s it. Food is the most significant expense for a majority of families. By using the envelope system of budgeting, you avoid overspending and can even bring the cost down.

How the Cash Envelope System Works…

There are several reasons why people overspend. First, we’re influenced every day by the decisions of other people, especially those around us. Studies show that we act against common sense when around family and friends. As such, we’re susceptible to financial faux pas.

Binge shopping is another issue at the heart of overspending. Compulsive shopping is a severe psychological issue. It’s usually exhibited by insecure people with low impulse control and low self-esteem.

Third, when we confuse needs and wants. It’s very easy to step over the line when we convince ourselves that we need something extravagant that we actually don’t need. For example, buying a smartphone that’s priced at £1,000 or more while you can be comfortable with a budget model that goes for less than £300.

Lastly, not using a budget. A budget is not just a tool for tracking your finances. It’s a stress reliever. When you control your spending, you don’t need to borrow and go into debt. If this is you, you need to use the Cash Envelope System.

Here is how it works….

Step One – Choose your Budget Categories

What items tend to bust your budget? Dave Ramsey recommends using the envelope system for such items. Divide the categories between fixed and variable costs. Examples of fixed costs include:

Utilities
Groceries
Rent
Mortgage
Insurance
Internet bill
Car maintenance and more

Variable costs are:

Fuel
Entertainment
Clothing
Medication
Eating out
Haircare
Gifts and more.

The categories above are just examples. You need to use categories that apply directly to your spending habits. How do you decide which categories apply directly to your budget? We recommend going through the past 3 to 6 months of spending. Categorize and organize your spending.

While having broad categories is good, it makes more sense to be specific. Instead of a broad category such as entertainment, be specific such as concerts, movies, books, computer games, dates and more. Even when it comes to a general category such as education, specify as follows:

Tutors
School trip fees
Private school tuition
School supplies
Extracurricular fees
Educational subscriptions

The benefit of specific categories is that when you’re having a tight month or cutting back, you can track your expenses and know where to cut down costs.

Here are the top five categories that must feature in your budget.

Mortgage or Rent…

This is the first category in your budget. Housing is a basic need, and as such, your budget should include either rent or mortgage payments. Do not include rent or mortgage payments in one large category, such as bills or monthly payments.

Utilities…

Like mortgage payments and rent, you can’t live without utilities. It’s best to include all bills in this category, such as water, electricity, trash, internet, phone, sewer or recycling. Label envelopes for the subcategories above. This will help you plan for every bill and track where your money is going.

Transportation…

If you own a car(s), you’ve to account for all expenses. That includes oil changes, fuel, new tires, car insurance and more. If you do not own a car, you should plan for transportation expenses such as bus passes, train passes, taxi or ride-hailing service.

The majority of car owners choose to include car insurance under transportation. This is common for people who pay monthly. For those who pay annually, they prefer having a separate category for car insurance and other expenses.

Groceries and Household Essentials…

These are two broad categories that you don’t need to split up into subcategories. The reason is there are lots of items under these categories. For example, groceries include fresh produce, dairy, baked goods, meat, and canned foods.

Examples of household essentials are toilet paper, toothpaste, paper towels, detergent, and more.

Personal Care…

Self-care is critical for your self-esteem and mental health. It helps to increase positive thinking, makes us less susceptible to anxiety, depression and stress. Taking time to care for ourselves reminds us that our needs are critical too. For example, you’ll always need a haircut, makeup, and nails. To ensure that you do not overspend, plan ahead by including the categories and subcategories above in your budget.

I hope you get the idea. Your budget categories may change over time and are not set in stone. As your needs, wants, and finances grow, adjust your budgeted amount and categories.

Step Two – Decide the Budget Amount for Each Category

Are groceries, entertainment, fuel and other expenses zapping your cash? Now that you’ve categorized your expenses, it’s time to allocate money for each category and subcategory. This is a critical step. As such, you should take your time. So, how do you decide how much goes into each category or subcategory?

The first thing you need to do is calculate your monthly income. Add all your income – main and side hustle for the month. In 2020, the average income in the UK was £25,780 per year or £1,950 per month. This was an increase of 3.4% compared to salary figures in 2019. Despite the COVID-19 pandemic, there was a 1.6% increase in the average pay compared to 2020. So, in 2021 the average salary is £26,193.

Next, deduct all fixed costs for each month. Leave this amount in your bank account. What’s left should be split between your budget envelopes. To know how much you should allocate for each category and subcategory, concentrate on two factors:

Your past spending
Current spending

For example, if you looked back at your expenses three months ago, you spent £200 on car maintenance or fuel. However, you want to cut down costs and bring this amount to £150 or £100. This is the amount you should allocate for that category. Work out how much you need to allocate for each category or subcategory.

You mustn’t exceed your monthly income. If you do, you have to borrow money, and that is how you get into debt. Debt leads to disastrous consequences. First off, it can destroy a relationship. Second, it leads to loss of assets and everything you and your spouse worked hard to create and grow. Lastly, it brings mental anguish.

So, why would anyone go into debt? There are several reasons why people go into debt.

Pride…

One of the reasons why people go into debt is pride. The majority of people worry about the social circles they move in. They also worry how their friends, family and neighbours perceive them. This drives how they spend money. As such, people will incur debt to maintain a false lifestyle and perception.

Lack of Self-control…

People lack discipline with their spending, while others do not want to control their spending. With time, we end up overspending on stuff, especially what we don’t need. For example, you’ll find someone buying an expensive smartphone, clothing, or shoes. What many people do not know is that we are all accountable for our spending.

Poor Money Management…

Poor money management stems from inadequate budgeting. Without a proper budget, you’re unable to track your expenses. But with a budget, not only can you track your spending, but you can cut down unnecessary expenses and avoid debt.

Step Three – Fill Your Envelopes With Money

Now that you’ve determined how much you need to allocate for each category, it’s time to fill the envelopes with money. Let’s assume the amount you budgeted for each category is as follows:

Your total monthly income is £1,500, and fixed costs amount to £1,000.

That includes:

Rent/Mortgage – £500
Car – £150
Groceries and household essentials – £150
Internet and mobile phone – £20
Utilities – £50
Personal care – £30
Savings – £100

Variable costs amount to £500, and they are:

Fuel – £50
Entertainment – £50
Clothing – £100
Eating out – £100
Medication – £50
Gifts – £50
Car maintenance – £100

Take your envelopes and label them according to the categories listed above. In each envelope, place the amount specified for each category. For example, in your envelope labelled “Car”, place £150 and in the envelope labelled clothing, put £100.

The goal here is to avoid overspending and track your expenses. Now that you’ve placed money in each envelope, you’ve cash to spend carefully. It would be best if you labelled each envelope clearly.

Every month, take one envelope and spend the money on that particular item. Once you spend it, the money is gone.

Let’s assume you get paid multiple times in a month. Follow the example above and allocate money for each category according to your past expenses. For example, you budgeted £200 for groceries, but you get paid twice a month.

When your first pay check comes, withdraw £100 from the bank and place the money in the groceries envelope. Once the second paycheck comes, repeat the same – withdraw £100 and place it in the envelope. For each category, you need to do the same. Just withdraw money from the bank based on the number of pay checks you receive every month.

It’s very easy to overspend when you receive multiple pay checks in a month. Before spending any money, make sure it’s split between your envelopes. Once you accomplish all the above, you’re ready for the next step.

Step Four – Spend What You Put in the Envelopes

This is the most challenging part of the Cash Envelope System. The last step requires you to spend what you put in each envelope. For example, if you placed £200 in the groceries envelope for this month, that’s all you need to spend. This calls for self-control and discipline.

To stick to this plan, there are a couple of things you need to do.

Leave Your Credit Card at Home…

Having a credit card makes it easy to overspend, whether in-store or online. This is because you can’t see the money trickling away like actual cash. Before you know it, your credit bill increases because of little things such as lunches, coffee and other unexpected splurges. Before shopping, make sure to leave your credit card at home.

Stick to Your Grocery Shopping…

When shopping for groceries and household essentials, stick to the list. It’s easy to blow your budget if you don’t stick to the list. We recommend compiling your list based on an itemized overview of what you need.

Take the Amount of Cash You Need…

When you go shopping, take the grocery envelope because this is the amount of money you need. By taking the precise amount of cash with you, there is no temptation to overspend. If you don’t spend all the money from an envelope when shopping at the store, put any change back in the same envelope. For example, if the money in your groceries envelope is £200, but your total is £150, put the £50 back in the envelope.

Avoid Borrowing Money From Another Envelope…

Never borrow money from another envelope, even when you run out of cash. It’s very tempting to shuffle cash from one envelope to fund another. For example, you used up all the money in your entertainment envelope.

Do not listen to your inner voice and borrow from your rent or groceries envelope. The whole purpose of the Cash Envelope System is to track and control your spending. If you run out of entertainment money, find creative ways for your leisure time.

If you drive to the store and forget the envelopes, drive back. In such a case, it’s ill-advised to withdraw money from your bank account. In case of an emergency and you don’t have an emergency fund, have an emergency budget meeting with your spouse. Figure out the best course of action, adjust your budget and agree on a joint decision.

Can You Pay for Expenses Online?

The Cash Envelope System works better when you pay for your utilities, groceries and other expenses physically. For example, pay for your meals when you eat out or getting a haircut. Using your cash envelopes online is challenging.

But if possible, don’t spend more than you budgeted. You must keep track of how much you spend. We recommend keeping a record of your expenses. One of the best ways to keep track of your expenses is by using Microsoft Excel or Google Spreadsheet.

What About Leftover Cash at the End of the Month?

If you’ve any money left in an envelope, congratulations. You managed to cut costs and also stuck to the budget. Reward yourself by going out for dinner or treating your family to a special day out. This is essential as it keeps you motivated.

You can roll the money over to the next month or save for emergencies. If you’re underspending, review your budget and reallocate the funds to other categories. Alternatively, you can follow Dave Ramsey’s Baby Step to take more control of your finances, save for retirement and invest.

Final Thoughts…

Dave Ramsey’s Cash Envelope System is a powerful money management tool. It can help you learn how to budget, track your spending and fight against overspending. This enables you to achieve financial freedom and avoid getting into debt. To make your money stretch and stick to your budget, put the Cash Envelope System to work for you.

Further Reading…