How to Set up a Cash Budget

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If you are new to budgeting, it can seem daunting and overwhelming. So many things to do and so much information out there.

It can leave you feeling defeated and less than motivated.

But if there is one place to start, it would be with a cash budget (read more on what it is and how we use it here). There’s a lot of information out there, but cash budgeting is simple to start and easy to start. It will change everything with the way you budget and will help you to begin down the road of paying off debt.

When we began our cash budget (read our cash budgeting story), everything changed for us. Before and after I began using a cash budget, I would try to budget without cash. It was never effective. Even if I planned out everything and knew how much money I wanted to spend, I could easily go over. By using cash, however, I quickly realized that if I don’t have the money, I don’t have the money. Something has to go back.

Cash is a tangible thing. It helps you to experience your money. You see it in your money, you watch it leave your hands. You feel the weight when you have it and you miss it when it is gone.

Cash budgeting is something that I can stick to and something that helps me limit my spending and save my money.

So how does it work? Here are 9 easy steps to start your cash budget today: 

Track your expenses and figure out where you spend your money

It’s difficult to know where to start if you don’t know what you spend your money on. For a month or two, track your bills and what you spend on a daily basis. If you have an idea of where your money is going already, you can skip this step and go straight into planning and implementing your cash budget.

Decide what specific cash categories you need

Typically, day-to-day expenses you can pay for with cash and fixed expenses (monthly bills) you pay from your bank account, automatically paid through a credit card, or you may write a check. Daily expenses can typically be broken down into categories. Some categories occur monthly/daily, while others (such as gifts and clothing) may not. That’s ok! You will still take out cash in those areas and save for the times you will need them. We use the following cash categories:

  • Groceries
  • Toiletries
  • Gifts
  • House expenses
  • Clothing/laundry
  • Eating out
  • Personal Cash

The cash categories are endless and they may change each month if you have something else coming up. For example, if you know you have multiple field trips to pay for this month, then you may want to include a field trip fund. If you planned a vacation or a special night out, you may want to shift around money to put towards that or take out extra money. Planning ahead is key in the cash budget system. It is always helpful to look at your calendar before each month and plan around what you have going on the best that you can.

Decide how much money you will need in each cash category

Deciding how much money to use in each category is something you can do in a few different ways.

First, you can use the months you tracked your expenses to determine an challenging yet appropriate goal for each category.

You can also use a percentage of your income.

Regardless, figuring out what is right for you may take a few months to get it spot on. The goal is to make the amount in each category challenging but doable. Your goal is to get everything you need, and for your budget to limit getting what you don’t need

To be honest “need” in a budget is a lucrative word. One person (ME) may NEED coffee, whereas another person could cut coffee out for the sake of the budget. Figure out your priorities and where you can cut costs.

Account for unexpected expenses

To account for unexpected expenses, you don’t need a large amount. The purpose of adding in a little extra cash as a buffer is so that when something unexpected does come up, then it won’t bust your budget.

In our cash budget, my husband carries an extra $50 to keep in his wallet. I am the one that typically carries around the cash because I am usually the one that goes shopping for the things our family needs. However, If Aaron has to make an unexpected stop at the grocery store and doesn’t have cash with him, then he has the extra $50 in his wallet to use on whatever he needs at the store. He will then later take the money out of the envelope that he spent from so he has the $50 back in his wallet. This money can also be used then for those unexpected costs that may come up.

Take out cash once a month

Typically we take out cash at the beginning of each month (read about how our Zero-Based Budget works). You could also take out cash at the end of each month. This depends on your budget and how it works best for you. Regardless, each month you will be taking out cash from the bank. It works best for me if I get my cash split into 20’s, 10’s, and 5 dollar bills so that I can split the cash into the appropriate categories. If I get too many large bills, it is hard to split up the money for the month.

Save for expenses that don’t happen monthly

Usually I don’t have to buy gifts and clothes EVERY month. I still take out money in these categories and save it up for when I do need that money.

For gifts, set a dollar limit for the people that you buy for each year for birthdays and Holidays. Add that number up and divide by 12. Then, add a little bit of money to each month to account for unexpected gifts that may come up (i.e. weddings and baby showers) and take that amount out each month. This way, when occasions, such as Christmas, come along, you are not busting your budget to buy for everyone you need to buy for. The money is already saved up!

The same goes for clothing. As a woman on a budget, I do not shop for clothes every month. My usual rhythm is to buy at the beginning of a new season, if there is an event, or a life change (such as pregnancy or having a baby).

Take out money each month, though. Since shopping for clothing is another thing that will bust your budget, save up the money throughout the months that you don’t go shopping. Then when you do go shopping, you will have the cash to spend.  It will help you to think twice before you purchase something because you are forcing yourself to save up for whatever it is that you want.

Account for online purchases

If you know ahead of time that you will need to make an online purchase during the month, then subtract that amount out of the cash you would take out in the correct category.

If you have to unexpectedly make an online purchase, treat it like a cash purchase. Then take out the cash from the appropriate envelope and either deposit the cash back into your bank account or save it for the next month.

Having a cash budget does not have to eliminate online purchases, but it can limit them. Limiting online purchases can possibly to save you money in the long run. I don’t know about you, but online shopping is all too easy. If I get an idea of something I want in my head, it is easy to trick myself into thinking I NEED that particular item. Then I can order it and have it shipped to my door within 2 days by a click of the button. Easy as that.

On a cash budget, I think twice about my purchases and limit what I do buy online. In the long run I don’t make impulsive purchases and save money.

Implement and track your budget

Go for it. You’ve got the tools. You know the basics. The only thing left to do is to do it.

I would recommend setting aside a monthly (or even weekly) meeting to talk with your spouse, family, or sit by yourself to see what is coming up for the month and what that means for your budget. This will help you determine how much money you need and where that money needs to go.

As you go through the month, track what you are spending your money on and in what categories so you can make changes as you figure this out. Tracking what you do and where you spend your money will help you to hone in on your spending, trim up your budget and pay down debt faster as you move forward.

Adjust and trim your budget

As you move forward, hone in on what areas you can make cuts in. As you start to really focus on your budget, you will notice trends and difficult areas. It also helps you to really think about each purchase that you make… and feel your money. Once you start to think this way, you find areas that you are spending that maybe you don’t need to be spending so much in. Groceries, for example, is always an area that is difficult for me but an area that I am constantly looking to trim up.

A Final Note

Beginning a budget can seem daunting and overwhelming. It can feel restrictive, but it doesn’t have to be. We were able to live on a budget and live our life. We traveled often and had fun with our friends and family.

Budgeting is simply a series of choices. We can’t say yes to everything, but our life became more rich because we were intentional about the choices we made and then things we did. We chose to make some sacrifices so that we could live in financial freedom.