What is the Cash Envelope System?
Have you heard of the cash envelope system?
Well,
By keeping your cash stashed away in envelopes, you can keep track of exactly how much money you have in each budget category for the month.
By peeking into your envelope at the end of the month, you can see how much money is remaining.
Isn’t that simple?
Take cash out for the amount you’ve budgeted for and put it in an envelope if you’re frequently going beyond in a single category.
Use only the money in your cash envelope when shopping for that category.
Once the money is gone, it’s gone. You’ll be forced to cut back on your spending and get closer to your financial goals faster.
How the Cash Envelope System Works
Begin by thinking about the many types of expenses you have and categorizing them.
You get to choose how wide or detailed you want to be in this section.
You can have a general “going out” envelope, or a “movies” envelope, a “drinks” envelope, and a “restaurants” envelope for example.
Then, for each category, label an envelope and fill it with the amount of money you’ve set aside for that expense.
You can divide your money anyway you choose, but the 50/30/20 budget is a smart place to start.
This implies allocating 50% of your after-tax income to necessities like rent and groceries, around 30% to desires such as travel and dining out, and at least 20% to savings and debt repayment.
Assume you earn $5,500 every month. Here’s an example of what your budget might look like:
- $2,750 in cash envelopes for your needs
- Your wants cash envelopes contain $1,650.
- $1,100 in your cash envelopes for debt repayment and savings.
When paying for something, only use money from the appropriate cash envelope.
For example, if you put $50 in a “coffee” cash envelope and go to Starbucks to buy a $5 latte, you’ll take the money from the envelope. You now have $45 to spend on coffee for the rest of the month.
Once a month, or after you receive your paycheck, you can refill your cash envelopes.
Cash Envelope System Summary
- You make a financial plan.
- Decide on your envelope categories and how you’ll divide your money.
- You stuff the envelopes
- The money in the envelopes is spent, and when it’s gone, it’s gone.
- Money left over in an envelope can be saved, rolled over, or used to your debt snowball.
- Begin the process over with the next pay period.
How the Cash Envelope System can Help you Improve your Financial Situation
You’ll be able to readily monitor how much you’re spending in each category if you use the cash envelope system.
You’ll be required to hand over cash in exchange for your transaction, rather than simply swiping your debit or credit card and forgetting about it.
The act of physically handing over cash can cause you to pause and consider how much you are spending at the checkout line.
When compared to plastic monies, spending cash is a more tactile procedure. You’ll be forced to see your cash funds diminish as you squander down the money in each cash envelope.
Seeing where your money is going might be a life-changing experience.
When you can see your money flying out of the envelope, you’re less likely to overspend.
You might, for example, avoid making an impulsive purchase near the conclusion of your shopping excursion since you know you only have so much money to spend in that category each month.
The cash envelope system may be a beneficial budgeting strategy to consider if you have a propensity of overspending.
Read: Are You Addicted to Spending? How to Overcome Compulsive Shopping
Advantages of the System
1. It will assist you with self-discipline
Whether it’s your spending habits, eating habits, or work productivity, you need discipline in your life to become a better individual.
The more discipline you exercise, the easier it will be to take responsibility for other aspects of your life that you wish to improve.
2. It is effective
The best thing about the cash envelope budgeting technique is how easy it is to use.
You cannot potentially overspend if you only pay for goods with cash and you run out of cash. For good reason, the cash envelope system has been around for a long time.
3. Your budget starts to take shape
When you use cash instead of plastic, the concept of money becomes much more tangible.
You can easily overspend with credit cards.
You’ll be more aware of your budget if you utilize envelope cash because you’ll be reminded of it every time you go for an envelope to spend from.
4. It can be used as a safety net
Many people carry plastic instead of cash, which might be problematic if an emergency arises.
Though the money in the cash envelope system isn’t designed for emergencies, you can always use it for one.
For example, if your car breaks down in the middle of nowhere and you need to pay for a tow or a transport home.
5. There are no overdraft fees
Have you ever had a bank charge you an overdraft fee?
You’ll be considerably less likely to overdraft and be charged the outrageous fee if you put your debit card away and use cash instead.
6. You won’t forget to pay
When you use the cash envelope system, you pay in advance and don’t have to keep track of anything.
On the other side, if you budget using an electronic tool, it’s simple to forget to enter purchases.
Because I lost receipts on a frequent basis, I believe the budget I tracked electronically was off by hundreds of dollars each month.
7. Spending that isn’t squandered
When I used an Excel spreadsheet to build my budget, I was astonished to see what I spent my money on at the end of the month.
When you utilize the cash envelope budgeting approach, on the other hand, you are more inclined to consider each purchase.
When you see your money evaporate before your eyes, you’re less likely to waste it. In reality, when paying with cash, customers spend 10% to 20% less.
Disadvantages of the System
1. To withdraw cash, you must go to a bank or ATM
I know many of you try to avoid going to the bank or the ATM as much as possible.
However, if you follow the cash envelope system, you’ll need cash from somewhere to fill your envelopes.
2. Getting the whole family on board is difficult
Some people are vehemently opposed to paying with cash.
Who can blame them for preferring the simplicity and convenience of utilizing plastic?
However, in order for the envelope budgeting system to function, the entire family must be fully committed to it.
It won’t work otherwise.
3. You won’t be rewarded with a credit card
I used to earn enough points with the top cash back credit cards before I started using the cash envelope system.
However, because you won’t be using your credit card as frequently, if at all, with the envelope budgeting approach, you won’t be earning credit card rewards.
4. Getting started is difficult
I understand that the procedure I outlined appears to be very straightforward, but you may ultimately encounter situations that are perplexing.
Where do you get the money if you buy $25 worth of groceries, $30 worth of clothing, and $15 worth of home decor from Target?
It’s likely that you’ll have to get it from three distinct cash envelopes.
As you figure out how to stay to your categories, you’ll go through a learning curve.
Cash Envelope System FAQs
1. What happens if I have cash left over at the end of the month?
Here’s a good one. It’s fine to celebrate and treat yourself if you come in under budget, but make sure it is within reason.
Why not treat yourself to a great supper or a nice latte? Rewarding yourself can help you stay motivated.
You can even carry the money over to the next month, giving you a larger grocery budget. That’s yet additional reason to rejoice.
2. What if I get the need to “steal” from other envelopes?
It’s akin to being on a diet. No one can force you to follow a diet or keep to a budget. It necessitates forethought and self-control.
In the budgeting process, you should rapidly identify your deficiencies and make necessary adjustments.
The solution is simple: Purchases should only be made when you have the correct cash envelope in your hand.
Leave the other envelopes at home if you can’t stick to the all-cash envelope approach. Don’t deviate from your shopping strategy or total budget.
3. What if I don’t have enough money in one of the cash envelopes?
This is critical. It’s not a good idea to “steal” from the other envelopes.
This defeats the whole point of the system. Here’s an original idea: Allow yourself to suffer a little.
The goal of the envelope method is to help you keep track of your expenditures and stick to your budget.
If one of your envelopes is running low, you may need to cut back, or do without until your next paycheck arrives.
Because it’s likely that you overestimated how much money you’ll need every month for some things, you’re permitted to make one adjustment to your estimates.
Don’t get into the habit of rearranging them.
4. How much cash should I bring?
The answer is all of the money you’ll need to make the “planned” transaction.
Because the cash envelope system pushes you to think about your purchases, a little thought and planning ahead of time will help you bring the proper amount.
This is about planned purchases, not impulse purchases.
5. Why is it that just cash is accepted?
Although there are modern alternatives to utilizing cash, such as the envelope system, research has shown that using cash really reduces spending.
Paying with cash activates various pain sensors in the brain. Consumers who pay with cash are more likely to search around, look for bargains, and spend less.
Swiping a card, on the other hand, encourages customers to spend more.
Read: How to Stop Spending Money
6. What happens if I spend all of the money?
So, if you’ve accurately forecasted the demand for all of the cash envelopes, you’ve won.
It won’t happen for a few months, but if you’re disciplined, the cash envelope system should modify your spending patterns.
What’s the point if not? The solution is to keep a miscellaneous spending envelope on hand. This can include unforeseen events such as a birthday present or a category overrun.
Self-control and discipline are non-negotiable items when it comes to money and spending.
7. What if I did everything online and didn’t have any cash with me?
The envelope system will continue to function, but in a different manner.
Remember, the purpose of carrying a small amount of actual currency is to keep track of how much you spend, almost like a quick visual.
The solution is simple: Money should be kept in your bank account, but expenses should be listed on your envelope. Ensure that you don’t exceed your spending allocation.
It may take even more determination, but the idea stays the same. You’re done after you’ve met your monthly budget.
There isn’t any more cash available.
Conclusion on the Cash Envelope System
Carrying cash in paper envelopes may seem archaic in today’s computerized age. However, don’t mistake it for being out of date.
What matters most is that it works. It will work as long as you follow the guidelines and put the plastic away.
After all, you can’t overspend if you’re out of cash and don’t use plastic.
Try using the cash envelope system to cultivate a spending discipline.