If you’re looking for a way to stay in budget by controlling your spending, the cash envelope system is one of the best ways to do it.
For most of us, overspending is one of the biggest reasons we go over budget. Sometimes, we just find it hard to limit how much we buy. Other times, we just lose track of how much we’ve already spent.
If you’ve experienced either of those issues before, you’ll be able to fix them by following the cash envelope system. Plus, it will help you save more in the long run.
Here’s how it works.
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What is the Cash Envelope System?
Simply put, the cash envelope system is a simple budgeting system that helps limit your spending on certain items. Here, you put cash into individual envelopes based on your different budget categories. The amount you put in each envelope will depend on what your specific goals are.
That means for a given month, you’re limited to spending on the cash that’s in a particular envelope. In doing so, it helps you control spending.
For example, if you budget $100 for your groceries, next month’s grocery envelope will contain cash equivalent to $100. Similarly, if you allocate $80 for beauty, then another $80 goes into the beauty envelope.
So, when the time comes you’ll use the money in the envelope for those expenses. In the upcoming month.
How Can It Help You with Your Finances?
The cash envelope system is very helpful in a few ways.
- Because you’re putting actual cash into the envelopes, you won’t be able to spend more than you actually have. This makes budget planning very effective.
- It also allows you to specify all your spending categories. This allows you to see exactly what items you’re spending on. And, if needed, cut them out. For example, you might have a grocery envelope. Then one each for utilities, home payments, insurance, and so on.
- You’re able to see what you’re spending. Since you’ll be paying with cash, you can see how much money is going out. And, how much you actually have left. With credit and debit cards, you don’t notice how much you’ve spent until the statement arrives.
- The actual handing over of cash to pay for things helps remind you how much you’re spending. This allows your brain to be very aware of your expenses.
- Once the envelopes are out of cash, you can’t spend anymore. This is one of the biggest advantages since it limits how much you can actually spend.
How Does the Cash Envelope System Work?
Now let’s get into the nitty-gritty of how to set up the cash envelope system to make it work for you. It’s worth noting that the better and more detail-oriented you are at organizing your envelopes, the more money you’ll be able to save.
1. Have a Budget That Works
The cash envelope system starts with a working budget. That is, you already need to have a budget in place or a basic budget. This allows you to know exactly how much you’re able to spend on any given month to cover expenses and other living costs without dipping into savings or going into debt/more debt.
2. Note Down the Categories in Your Budget
One of the most important things when creating an envelope system is to define your different budget categories. These can include:
- Medical & Healthcare
- Debt Payments
- And others
Some categories are non-negotiable. For example, housing, debt payments, utilities, medical, and insurance. Then there are other items like transportation which are essential.
But, in some cases, you may have the option to decide whether to commute or drive your own car. If you choose the latter, then you’ll need to breakdown the different expenses for your vehicle. This can include car maintenance and gas. Similarly, food can be broken down into grocery and eating out.
Doing so allows you to limit eating out for example or know how much you’re actually spending for gas.
Don’t worry about getting everything perfect for the first couple of months or so. As you get to know your expenses better, you’ll be able to divide the categories and sub-categories better to make saving more efficient.
3. Figure Out a Spending Limit for Each of the Categories
Once you have your categories in place, the next step is to put a monthly spending limit for each. Do note that the limits can change depending on the time of year.
For example, during the holidays, gifts, entertainment, and food are likely to be higher than the other months. Similarly, during the summertime, travel or transportation may be a little higher because you go on vacation.
The goal is to set practical spending limits for each month and stick to them. Being consistent is what will help you save for the long term.
4. Designate an Envelope for Each Budget Category and Fill it with Cash
Now, it’s time to take action.
The first thing you’ll need to do is withdraw cash to fill the envelopes. Here, it’s important to follow the limits and rules very religiously. This means money allocated for a certain budget category CAN ONLY BE USED for that category. No moving things around. No financial gymnastics allows.
5. For Each Budget Category, Spend Only the Money Allotted in the Envelope
Once you hit zero, you’re done for that category. So, it’s important to count what’s left every time you take money out of an envelope.
This makes you accountable. It also allows you to keep track of what you’re spending. And, it lets you limit how much you spend each time you go buy something.
6. Adjust the Amounts (and Categories) as Needed
Sometimes, you’ll need to make adjustments. The important thing here is to do it in a practical manner. Adjusting the amount so that you have extra cash on hand “in case you need it” is not a good idea. That’s because it tells your brain you can cheat.
And, soon enough you’ll be adding a few bucks here and there which ultimately defeats the use of the cash envelope system.
Remember, the goal is to save money and improve your finances. At times, that may mean sacrificing in the short-term for the long-term good.
Some Common Cash Envelope System FAQs:
Here are some common questions I get and had myself with the cash envelope system. To help you troubleshoot them, here are the things I found that helped the most.
What Happens If You Run Out of Money in a Cash Envelope?
The hardest thing I had to learn with the envelope system was finding a way not to run out of money. The second was the stay away from the temptation of moving money from one envelope to another.
But, you need to learn how to do both to be successful.
What worked for me was to always keep a mental note of how much was left in each envelope. That’s because certain envelopes tend to run out faster than others. It all depends on what you like doing.
For me, gas and eating out were usually the problem points. Hobbies and entertainment are likewise other envelopes that can probably give you issues.
By keeping track of how much was left each time you took money out, you’ll be able to make some kind of estimate on how far “ahead of schedule” you are. For example, if you have $100 in your “eat out” envelope. And, you’ve spent $60 before the end of the 2nd week of the month. This is a sign you’re way ahead.
So, by checking the envelope regularly, you’ll know you need to limit eating out. It can also mean eating out at cheaper places or bringing food to work.
What Do You Do When Emergencies or Unusual Circumstances Happen?
Here, there are a few ways to go about it. The one that worked for me was to create an “in case SHTF” envelope. This had 10% of the budget for each month.
So, in case anything happened, I can dip into it knowing that I don’t have to take anything out of savings or borrow money.
The problem with this method is the temptation to take money from it when some of the other “fun” envelopes like eating out and entertainment are depleted.
Another option is to call an emergency family meeting and talk things out. From there, you can all discuss what to do and if needed, make a one-time budget adjustment for that specific circumstance.
What Do You Do If You Have Extra Cash Left When the Month Ends?
This is the ideal situation. If you end up with extra cash at the end of the month, you win!
That means you came in under budget. And, in doing so, you get a few options on what to do with the extra cash.
- You can eat out or use it to do something fun.
- Save it. You can put it into savings or investment. Or, you can put it into your vacation fund and use that to save up for a trip later on.
- Pay off debt. This is probably the least fun since the money seemingly goes away as well. But, it should be the first thing you do with extra cash if you have debt. That’s because debt comes with growing interest which adds up the longer you hold on to it.
The cash envelope system is a very effective way to help you save money by controlling your expenses. If you’ve had problems controlling spending or are looking for a way that will help you curb overspending, this is a good method to go with.
In addition to helping you limit spending, the cash envelope system helps you understand your budget better by allowing you to allocate spending for each budget category.