So you’ve heard about the cash envelope system and you’re wondering whether or not it’s right for you. In this blog post, we’ll discuss what this system is, how to use one, the benefits of using one, and the pros and cons.
We’ll help you decide whether or not using envelopes with cash is the best choice for your financial situation!
What Is the Envelope Budget System?
The cash envelope technique is a budgeting method that helps you track your expenses by separating them into different categories. Each category has its own designated cash envelope, and when the cash in that envelope runs out, you can’t spend any more money in that category.
For example, let’s say you want to create a budget for groceries. You would create a grocery cash envelope and put a set amount of cash in it each month. When that cash runs out, you can’t spend any more money on groceries!
You can use this cash system for any type of budget, including categories like rent, utilities, transportation, and entertainment.
The DIY cash envelope system is a great way to stay accountable to your budget and avoid overspending.
Nevertheless, some people find the system difficult to stick with because it can be hard to resist temptation when you see the cash in your envelopes. Others find that the cash envelope method is a great way to keep track of their spending and stick to their budget.
Cash Envelope System for Beginners in 4 Simple Steps
Setting up your system is easy. You can use cash envelopes that you print at home or cash envelopes that are available for purchase online or in stores (there are some really creative options). You can even make cash envelopes from scratch, but this will take more time and effort than buying ready-made cash envelopes.
Whichever type of envelope you go for does not matter as long as you complete the following steps:
- Decide what cash envelope system categories you want to budget for (savings, gym, eating out, groceries…).
- Create cash envelopes for each category (buy or make them)
- Put a set amount of cash in each envelope each month without exception.
- Stick to your budget by only spending the cash in your envelopes!
Sounds easy, right? Let’s give you a few more practical tips.
How to Use Cash Envelopes Right
Once you have your cash envelopes, it’s time to start using them. What if you run out of money? Can you use credit cards too?
Here are some tips for how to do the cash envelope system with success:
- Keep cash on hand in case of an emergency or unexpected expense.
- Always have cash ready at all times so that you don’t feel tempted to overspend when you see the cash in your cash envelopes. Basically, get used to having money with you instead of thinking:” I will buy this when I have cash”, which eventually prompts unnecessary splurges.
- Use cash instead of credit or debit cards when possible so that it becomes a habit to use cash first and only use other forms of payment if necessary.
- It’s OK to take money out of one envelope and put it into another if it’s absolutely needed. For instance, if you run out of money for food because you overspent this month. Still, try not to do this too often as it can become a slippery slope.
Practical Examples
The budget envelope system works for most people if they know how to use it in practice.
For example, you go to the supermarket to buy some groceries and you also need some basic supplies such as cotton pads, toilet paper, etc. In order to do this right, you should ask for two different bills at the checkout, or put them on the same bill but still used two different envelopes for paying.
What if you forgot your envelope for a particular expense? Easy! Put all the items back on the shelves and leave the store. The envelope system for your budget takes some getting used to.
You have $100 in your envelope but at the checkout, your groceries bill is $105? Go back and return the extra product(s)!
The system is pretty straightforward, but it takes perseverance and determination to get used to this new kind of responsibility.
If cash isn’t working out as planned, don’t give up! You might need more time or experience before cash feels like the right choice for your budgeting needs.
What If I End Up with Extra Cash?
Should it happen that you haven’t spent all the money, that definitely calls for some celebration! Jokes aside, you can put that money into your savings account, pay off debt faster, or simply increase your budget for the month ahead of you.
What you decide eventually depends on what your priorities are at that particular moment — do you have a debt to pay off, or is the next month loaded with extra expenses such as a friend’s wedding present or going on a holiday?
Benefits of Using Cash Envelopes
There are several benefits of using cash envelopes for budgeting, including:
Increased Accountability
When you’re only allowed to spend the cash in your envelopes, you’re less likely to overspend. This is because you can see how much money you have left in each category and how quickly it’s dwindling.
Easier Budgeting
It’s much easier to stick to a budget when you’re using cash instead of credit or debit cards. With this system, you can see exactly how much money you have to spend in each category.
More Flexibility
Once you learn how to use the cash envelope system, you’ll see that it gives you more flexibility than other budgeting methods. You can use it to budget for any type of expense, including fixed and variable expenses.
More Cash on Hand
When you’re used to cash instead of credit or debit cards, there’s no need to worry about overdraft fees or interest charges.
Less Stress
It can be stressful when you’re trying to stick to a budget, but cash envelopes make it easier. You’ll hardly overspend since you see exactly how much money you have left for eating out this month, for instance.
Teaching Kids Money Management Skills
You can use cash envelopes as a tool to teach children about money management and budgeting since the principle is fairly simple. Another method to become money savvy is to get them a kid’s debit card.
Disadvantages of Using Cash Envelopes
Although there are several benefits to using the cash envelope saving system, there are also some potential drawbacks:
- It can be hard to stick to a budget if you have a lot of variable expenses that don’t fit a single category.
- It can be easy to forget that you have cash in your envelopes if you don’t use them often, or you can forget that particular envelope at home.
- If you’re not careful, it’s possible to run out of cash before the end of the month.
- If you don’t have much money saved up, it might be difficult to last the entire month using the envelope budget system instead of a credit card.
- If you’re not used to using cash, it can be hard to remember how much money is in each envelope. This might lead to overspending or underbudgeting.
The bottom line
Placing all your earnings into envelopes is a tried and true method for managing your finances. It can be helpful for people who want to stick to a budget, save money, and avoid overspending. Although there are some potential drawbacks to using cash envelopes, the benefits of using this system definitely outweigh the negatives. Try it out and see if it works for you!
FAQs
How does the cash envelope system work?
It is fairly simple. You should take your monthly income (after taxes) and distribute the cash into different envelopes arranged into categories, e.g. savings, gas, gifts, groceries, eating out, entertainment, etc. and spend cash and cash only till the end of the month, i.e. your next salary.
What are the pros and cons of the envelope system?
There are several advantages of the envelope system: flexibility, easier budgeting, avoiding overspending. On the other hand, it is not sustainable if you are already challenged with your savings, you tend to forget how much money you have with you, or have variable expenses.
What is a cash flow plan?
A cash flow plan is a budgeting method that helps you track your income and expenses over a specific period of time, usually one month. This cash envelope principle is based on the cash flow equation, which states that income minus expenses equals cash flow.
You can use a cash flow plan to track cash coming in from sources like wages or investments, cash going out for expenses like groceries or rent, and how much cash you have left at the end of the month.
Are cash envelopes a good idea?
Cash envelopes are a very good idea to learn how to manage your finances with exactly as much money as you earn each month. It should also provide you with a clear picture of how much you spend every month on entertainment, food, etc.
What is a zero-based budget?
A zero-based budget is another system with cash envelopes where you make sure that every dollar of income has a purpose. This means that you plan for every dollar to be allocated toward some type of expense or saving/investment. It’s called a zero-based budget because your budget starts at zero every month and you work your way up from there.
What is the 50 20 30 budget rule?
The 50 20 30 budget rule is a cash allocating system where you break down your income into three parts:
- 50% of it goes toward needs (housing, utilities),
- 20% goes toward savings and debt payments, and
- 30% goes toward wants.
The goal of this cash envelope system is to make sure that you’re spending no more than what you earn each month.
