How did we pay off $166,000 in student loan debt within 4 short years? The envelope system! We started using cash! It’s possible to use cash for things still! In fact, it is proven to be better than swiping your card. Especially when you are trying to pay off debt, cash is your friend! But what the heck is the envelope system you ask? Allow me to explain.
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The Envelope System
Besides using the debt snowball, one thing B and I did when we started implementing strategies from Dave Ramsey’s Financial Peace University, was the envelope system. The envelope system is a way to use cash for certain things that you pay for. You take out cash, place it in an envelope labelled for something specific, and only spend what is in the envelope. It’s basically a supplemental system for your budget to allow you to take control of your spending, and pay off debt fast!
“Cash Is King” – Dave Ramsey
Why would you use cash you ask? Isn’t cash so inconvenient? I will tell you right now, cash is one of the biggest ways we paid off our student loans in 4 years.
Studies have shown, when people use credit cards, they spend at least 5%-10% more than they would have if they used cash. Why is this? Because doesn’t hurt when you swipe your card. It hurts when you use cash. Taking a $50 bill out of your wallet to pay for something makes you more aware of how much you are spending than when you swipe a card and don’t even see the transaction.
Have you thought about that lately? You see something in the store that you really want. So, you pick it up and pay with your card at the register. You barely pay attention to how much it cost. It isn’t on sale, so you pay $75 (full price.) Two weeks later, you look at what you bought, and realize you should never have bought it. You realize will never actually use it. It was an impulse purchase. However, taking it back is too much work and you don’t have time. So it sits in your closet for five more years before you finally get rid of it.
Now imagine you have a specific amount of money set aside in your budget for the thing you saw in the store. If you are carrying around cash and only have what is in the envelope, will you think twice about purchasing that impulse buy? If I only had $50 to spend, I would research what I was going to buy, and definitely try to find it on sale. So, instead of spending $75 on something I didn’t really need, I would spend $50 on something I got on sale and really wanted. Do you see how great cash is?
I see how great cash is, but I can also see the power of credit cards! Credit cards allow you to buy things you don’t actually have the money for right now. Credit cards are powerful tools that allow impulse buying and instant gratification. Now, when you are trying to pay off student loans, or get out of debt, you need self-control. You cannot just indulge in instant gratification. Self-control is very difficult when you have access to a credit card.
B and I were able to have self-control while paying off our student loans because of the envelope system. We made our budget, and we were extremely strict with sticking to it! (We still are, actually.) When you use cash and see how much money you are spending on certain things, it makes you more aware. This allows you to budget well, and stick to it!
How The Envelope System Works
So basically, in our budget, we set aside certain things to pay for with cash. The categories were food, entertainment, supplies, health, dog, and car. We have a ton of other categories that we put money into, but they are not cash. The reason is, it’s very difficult to pay cash for gasoline since we buy all of that at Costco. Costco Gas does not allow cash. Therefore, we set a certain amount of money for gasoline and keep track of it on our budget. Once the gas money is out for the paycheck, we can’t buy anymore. We also do this for many other categories, such as haircuts, health, Christmas gifts, etc. See my How To Create A Budget post on all the specifics.
SET AN AMOUNT
When we set up our budget, we came up with an amount that would work for each of these categories. For example, we need $x amount of dollars for food every two weeks. Or, we will give ourselves $x amount of money for entertainment like going out to eat, or going to the movies, etc. Also, we need $x amount for supplies for the house such as TP, paper towels, soap, etc. So, choose an amount that works for your family. Make sure it works with your budget, and you are being reasonable.
GET OUT THE CASH
Now, we get paid every two weeks. Therefore, every payday, I go to the ATM and get out all the cash for every envelope. I separate the cash into each specific envelope, and add it to any extra left over. Each envelope is specifically labelled, so I know exactly which one to use. On the front of the envelope, I write the amount that is inside. This way I know how much we started out with, including the extras. For every time we spend money inside the envelope, I write down the amount on the front. For example, say you start out with $200 for food, but you go grocery shopping and spend $45. Subtract the $45 on the front of the envelope, so you know you only have $155 left for food. This allows you to keep track of how much is in the envelope.
If we have extra cash in an envelope because we didn’t spend all of it, it stays there. We do NOT take money from one envelope and use it for another category. Once the money is gone, you cannot spend anymore. That is the whole point of the envelope system. You budget well, and you have self-control. It will allow you to put all your extra money into those loan payments!
Extra money stays in the envelope like a sinking fund. So for example, we did not have time one paycheck for a date night, so we didn’t spend any of our entertainment money. The next paycheck, we add our budgeted amount in with the left over amount and we have double the money this time for our date!
Once the envelope is empty, you cannot spend anymore money. No using the credit card or taking money from another envelope! If we use all of our food money, then we do not buy food until the next paycheck. If we are constantly running out of food money, we figure out why that’s happening. Maybe we are buying food we really don’t need. Or, maybe we are impulse buying ice cream because we are going grocery shopping when we are hungry. (THE WORST IDEA! I spend so much extra money when I shop when I’m hungry!) Or, maybe we really just need to increase our food budget amount because we underestimated the amount of money we spend on groceries. Whatever the reason, we figure it out!
STICK WITH IT
It’s so difficult at the beginning to use the cash envelope system. I would always forget to bring the cash with me and we would have to drive back home and get it. We would spend all the money in our entertainment envelope and I would want to just use the credit card to go out to eat one night. Part of me was afraid all of our cash would get stolen and using the envelope system wasn’t safe.
However, despite all my fears, frustrations and failures, I can tell you it works! Our money has never gotten stolen. I have never lost the envelopes. We have used cash for the last 3 years and it is the best thing ever! The envelope system has shown me that I can have self-control over my purchased. It has opened my eyes to how much things really cost! Seriously, the envelope system works. It was just one more helpful change in our lives to allow us to pay off our student loans and live like no one else!
Have you used the envelope system? If you have, I would love to hear what categories you have in your system! I would love to hear if it’s worked for you and if it hasn’t. And if you haven’t tried using cash, TRY IT! Figure out a budget and see how it can change your life!