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  • Feb 21, 2020

    Envelope Budget System: An All-Cash Diet to Trim Your Spending

    Alyzabeth Smith, CPABy Alyzabeth R. Smith, CPA


    MoneyLife100Studies show that people tend to spend more when they pay electronically. Not having to physically hand over cash can significantly numb the pain of spending. If consumers had to pay credit card interest and fees upfront and in cash, the hidden (or ignored) accruals would suddenly be more immediately impactful and might deter some frivolous purchases. That’s not going to happen, but switching to an all-cash diet can help you see exactly what you’re spending and could deter some of your more wasteful or frivolous purchases. Using nothing but cash for transaction may not be a practice you can maintain for a lifetime, but for a determined (and lengthy) amount of time it could be a good way to gain control over your finances and begin to stack some cash. Additionally, if there is a certain area of your life that seems to trigger uncontrollable spending, putting yourself on an all-cash diet can help curtail spending binges.

    cash in a sackSome financial planners refer to this “cash-only” practice as the envelope system because, in theory, you could place what you are going to spend for an allotted amount of time in an envelope and use only those funds as necessary. The underlying premise is to use cash as your sole method of payment for daily expenditures. That said, there are some bills for which you can’t pay cash and there are some vendors who refuse to accept cash (though some cities and localities are outlawing that business practice). When bills must be paid electronically, allocate electronic funds for those obligations but continue to make all other purchases with cash. Setting up bill pay with your bank is a great way to accomplish that objective. Regarding the merchants who don’t accept cash, they need to be avoided if they offer products and services that can be purchased elsewhere.

    The biggest advantage of the all-cash diet is that it compels responsibility and self-control. It also means that you might end up shopping less since strict observance of the all-cash diet would severely limit online shopping. While some propose treating online shopping the way you would those bills that can’t be paid with cash, that act would essentially be a surrender to a budget that doesn’t force discipline with the same amount of severity.

    Since you may not want a pile of cash for the month sitting around your house, you may want to do a budget that details cash withdrawals as necessary within the confines of the budget parameters. If the envelope system is one that you think you might stick to for a while, make sure some cash is allocated for unassigned discretionary spending. This way you can improve the likelihood of adhering to the plan by making it more livable.

    As with everything, the all-cash diet has downsides. Fees from out-of-network ATMs can add up, and wanting to buy something that is just a few dollars over your cash allotment can lead to spur-of-the-moment budget violations. Also, carrying cash can be a nuisance, and keeping large amounts of it on your person can be dangerous.

    Keeping track of dollars and cents may be too overwhelming for some people. As is the case with a food diet, starting off with something too strict might result in binging and actually gaining more weight. The envelope system might be an oldie but goodie to some, but to others it might just seem old. There are, however, apps available that can help guide your spending, and many of them can be linked directly to your bank account. Some banks even offer electronic budgeting tools to help keep you on track.

    At the end of the day, carrying cash for your daily expenses is an easy way to stay focused. Once the cash is gone, that’s it. Your pockets have nothing but lint and the spending spree is over.


    Alyzabeth R. Smith, CPA, is a senior associate with Siegfried Advisory in Wilmington, Del. She serves as chair of the CPA Image Enhancement Committee and is a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at alyzabeth_smith@msn.com.


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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.