The Cash Envelope System is a budgeting method that can help you take control of your finances and reach your financial goals. The basic idea behind the system is to allocate cash for specific expenses, such as groceries or entertainment, and physically keep the money in designated envelopes.
Table of Contents
- How Does The Cash Envelope System Work?
- How To Create And Use A Cash Envelope System
- What if My Cash Envelope Runs Out of Cash?
- What Happens if I Still Have Cash at the End of the Month?
- Advantages And Disadvantages Of The Cash Envelope System
- Where To Find Your Cash Envelopes
- Final Thought
How Does The Cash Envelope System Work?
Depending on the budget categories, you put your cash in different envelopes. You’ll decide how much to put in each cash envelope based on how much you want to spend.
For example, you could put $300 in the budget for groceries and $150 for fun. The key is that you can’t spend the money in these envelopes on anything else until the next time your budget cycle comes around.
The cash envelope categories are only for your spending that changes over time. This involves skincare products, groceries, fun, and things for the house. You might also attempt a cash envelope challenge for a set amount of time.
Fixed costs, like your mortgage or auto loan payments, are supposed to be separate from your cash envelope budget. You can keep paying these fixed costs like you always have.
How To Create And Use A Cash Envelope System
1. Make a Spending Plan
You must make an excellent budget to utilize your cash envelope system well. Putting too much or too little money in your envelopes could ruin your financial life.
It’s easy to make a budget for yourself, but you should know that you’ll probably have to change it over time. As you get older, your life changes, and you’ll have to adjust to new costs as they come up.
You’ll need to track your spending to start making a good budget. If you don’t know where your money goes each month, this is where you should start.
You can keep track of your spending by going through your bank and credit card statements or by saving your receipts. You should keep track of your spending for at least a month. You should keep track of your expenses for 3 months to get an idea of your variable costs.
Keeping track of your expenses is essential, but you also need to figure out how much you can afford each month. Look more closely at your income after taxes to ensure you’re making a budget you can stick to. After you figure out how much you make after taxes, figure out how much of that money you need to pay for fixed costs like your mortgage.
After you take out your fixed costs from your income after taxes, you’ll know exactly how much money you have left over for variable costs. You can put all of your variable expenses into envelopes.
2. Look At Where Your Money Is Going
Once you’ve kept track of your expenses for at least a month, you can put them into different cash envelopes categories. Find out how much you’ve spent in each category.
A few things you might want to put in your variable cash envelopes are:
Everything else needs to be paid for out of your variable costs.
Once you know how much you’ve spent in each category, make sure you can keep spending at this rate. You might be surprised that you’ve spent more money in a given month than you’ve made.
If you’ve spent more than you planned, the cash envelope system might be the best way to get back on track. It will make you think about how much you want to spend before you buy something.
Think of each step in the cash envelope budgeting system as a new beginning. Don’t blame yourself for the money mistakes you’ve made in the past. Instead, think about your financial goals.
A cash envelope system can help you reach your goals of paying off debt or saving more money.
3. Put Restrictions On Each Category
The next step is establishing spending caps for each cash envelope category. Consider your current spending capacity first, followed by your recent expenditure. Determine your spending caps based on what you can afford in a particular category.
Your new spending restrictions may seem severe if you have a history of consistently spending more than you make. However, it is crucial to be upfront about this because living within your means is essential for long-term financial and overall well-being.
If you find it difficult to control your expenditures, consider a flexible side business to help you augment your income.
4. Put Cash In Your Envelopes
Filling cash envelopes is simple once you’ve established your spending caps for each cycle. You can decide whether to stuff your envelopes once a month or once per payday. Find a cycle that works for you and make an effort to follow it. When withdrawing cash, be mindful to avoid paying any unnecessary ATM fees.
You must carefully spend from the proper cash envelope categories when the money is placed in the designated cash envelopes. You can roll over extra cash into the following cycle or save it if you have it after one cycle.
5. Adapt as Necessary
It’s crucial to be aware that you might need to make adjustments as you go along if you want to keep using the envelope money technique. In fact, it should be expected that your budget will need to be adjusted along the way. Expect not to achieve your spending caps in the first month.
While some categories may look overstuffed, others may seem unduly condensed. Although all your spending is changeable, you want to maintain your spending limits for each category reasonably near the amount you require each cycle.
As the procedure progresses, you can discover unintentional spending patterns ruining your budget. You might also find that you are more frugal than you anticipated! When money is tight, you may want to try a do-it-yourself solution rather than spend money to solve your difficulties.
Consider a different strategy if you discover that the cash envelope approach is ineffective for you but that the budgeting categories are useful. Instead of using a cash system, you might want to move to a “virtual envelope” approach. Recognize your individual tastes and create a budget that will motivate you to stick with them.
What if My Cash Envelope Runs Out of Cash?
Refrain from taking money from different cash envelopes. Moving money from one category to fund another might be very tempting while using the envelope technique.
If your restaurant envelope is empty of cash, don’t be startled if a voice inside you urges you to take your clothing envelope. Always remember that using cash envelopes is meant to help you manage your spending and adhere to your budget.
Consume leftovers rather than eating out if you run out of restaurant money. Limit your journeys or try carpooling to work if you see that your petrol budget is disappearing faster than you anticipated. When the envelopes are running low, devise inventive ways to stretch your money.
What Happens if I Still Have Cash at the End of the Month?
Congratulations if you still have money in an envelope at the end of the month. The world’s best sensation is that one. And, within reason, it’s acceptable to celebrate.
Go out to dinner as a reward for yourself. Alternatively, carry the money to the following month for a substantial food budget. It’s crucial to treat yourself because it keeps you motivated. Celebrate all of your small victories along the way.
Take that extra money and put it toward your debt management plan. Each little bit counts.
Remember that cash envelopes are practical tools in the battle against excessive spending. They can assist you in managing your finances efficiently.
Advantages And Disadvantages Of The Cash Envelope System
The pros of this system include the following:
- Helps control spending: By physically holding onto cash, individuals may be less likely to overspend as they can see the money physically depleting.
- Helps with budgeting: By allocating cash for specific expenses, individuals can more easily stick to a budget and keep track of their spending.
- Can be a good solution for those with credit card debt: Using cash instead of credit cards may help individuals avoid overspending and accumulating debt.
The cons of this system include the following:
- Can be inconvenient: Carrying around cash and multiple envelopes can be cumbersome and may not be practical for some individuals.
- Limited flexibility: Once the money is allocated to an envelope, it cannot be easily transferred to another expense.
- Vulnerable to theft and loss: If money is lost or stolen, it cannot be easily replaced like a credit or debit card.
Where To Find Your Cash Envelopes
You can find them at various places, including:
- Office supply stores: Many office supply stores, such as Staples or Office Depot, sell a variety of cash envelopes.
- Online retailers: Websites like Amazon, Etsy, and eBay have a wide selection of cash envelopes.
- Craft stores: Stores like Michael’s and Jo-Ann’s Fabric and Craft Stores sell cash envelopes and other crafting supplies.
- Bank: Some banks may have cash envelopes for their customers to pick up.
- Online marketplaces: Etsy, Amazon, and Walmart can offer various cash envelopes.
- Stationery stores: Many stationery stores sell cash envelopes.
Overall, the Cash Envelope System can be an effective budgeting tool for individuals. By physically holding onto cash and allocating it for specific expenses, you can more easily stick to a budget and keep track of your spending.
However, it’s important to keep in mind the downsides of the system and consider if it’s the right fit for you before getting started.
Author bio: Lyle Solomon is a licensed attorney in California. He has been affiliated with the law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their debt problems.