The cash envelope system is a great way to keep you accountable for your finances and help you save money. In other words, it’s a system that allows you to manage your money more efficiently. You’ll have a visual understanding of where your money goes every single month.
Whether you are looking to control your spending habits or make savings a priority, the cash envelope system is the tool that will help you accomplish those financial goals.
This system may be hard at the beginning if you were used to mainly purchasing with credit or debit cards. But, with discipline and by correctly using the cash envelope system, you’ll find that it’s a powerful method that can help you get out of debt, be more intentional with your money, control your overspending, and start saving money.
For many, saving money can be difficult, especially if you’re on a tight budget. Sometimes, there just doesn’t seem to be enough money to go around, so saving doesn’t seem feasible. But it is possible and may even be easier than you think.
What Is the Cash Envelope System?
The cash envelope system is simply using cash for the expenses in your monthly budget. Basically, you’ll put cash in envelopes for each category or expense in your budget. This method is a great idea if you’re starting to manage your finances through budgeting.
This system has been around for a long time, but convenience has taken its place in many households. It’s much easier to use a credit or bank card to pay for all your purchases than it is to use cash. Unfortunately, doing so also makes it much easier to overspend and blow your budget right out of the water. It’s much harder to stay on track when you have easy access to your money and credit, but the envelope system can help.
How to Use the Cash Envelope System
The cash envelope system is one of the easiest ways to save. This system is designed to help you stay on budget and discourage wasteful spending. In some cases, you may even see a decrease in your spending, leaving extra money in your pocket at the end of each month to save.
In a nutshell, the cash envelope system consists of using cash instead of plastic, and all you need to get started is a box of envelopes. I personally use this wallet system, it has everything I need to make the cash envelope system work for me. You can easily customize it by adding the categories you’ll need!
The Cash Envelope System: How It Works:
1. Start a Budget
To make the cash envelope system work for you, you’ll first need to create a budget. This way, you can see how much income you have and what your monthly expenses are.
After setting your budget, you’ll notice that some expenses, such as utility bills, house payments, credit cards payments, insurance, or car payments, are paid by check or automatic withdrawal. These expenses cannot be included in your cash envelope system because most of the time, they are the same each month and are difficult to pay with cash.
Look for categories or expenses that may need improvement in your budgeting system. In other words, look for the variable expenses in your budget or expenses that fluctuate every month.
Cash Envelope System Categories
After separating out your regular monthly bills, make a list of all your other expenses and divide them into different categories. These are some of the categories you might include in your cash envelope system:
- Dining Out
- Personal Care
- Miscellaneous Shopping
2. Determine How Much Cash You’ll Need
Determine how much money you’ll need or have for each category based on what’s left after paying your regular bills for the month. Then create an envelope for each one of your categories, labeling it with the category’s name. You don’t need to buy fancy envelopes to get started. Plain white envelopes work just fine for this cash budgeting system.
3. Fill Your Envelopes
When you get paid, take the cash out of the bank and place the designated amount in the appropriate envelope. For example, if you determined that you need $50 a week for fuel, place that amount in the envelope marked “Fuel” or “Gas” for a total of $200 per month.
Another category for your cash budgeting system could be your grocery budget. Let’s say you’re paid twice a month, and your monthly take-home pay totals $2,000. You know that your budget allows $500 per month for groceries.
For each paycheck, you’ll withdraw $250 from your bank account and put the cash in the envelope labeled it “Groceries.” That money will be strictly used for your groceries and nothing else, ensuring that you stick to your budget and avoid overspending.
When you receive your second paycheck, you’ll repeat the same process; withdraw $250 (making a total of $500/month in groceries), put the cash in the “Groceries” envelope, and use it only for your groceries.
Repeat the same system for the rest of your expenses, such as entertainment, dining out, clothing, etc.
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4. Stick to Your System
As I mentioned before, only spend the money in the envelopes for their stated purpose. Do not take money from one envelope to cover expenses for another category. When you go to buy groceries, only take that envelope with you. This way, you know you only have that designated amount of money to spend, so you can’t go over your budget. This will discourage you from spending money on items you don’t really need.
I know this method requires a lot of discipline, which can be hard at the beginning. But if you stick to the system, you’ll have a great tool that will help you be more mindful when spending money.
What to Do with Money Left Over
If you have any extra money at the end of the month, a great idea is to add it to your emergency fund or savings account. Another option is to put the money towards paying off debt. If you are debt-free, use the extra money for an upcoming purchase that you would like to pay cash for.
How to Use the Cash Envelope System when Shopping Online
You can also manage your online shopping with the cash envelope system. When you create your envelopes, include one labeled “online,” but don’t put any money in it. Then, when you need to shop online, use your credit or debit card. Immediately after you make the online purchase, take the amount of money you spent online from your regular “Miscellaneous” envelope and transfer it to the “Online” envelope.
Alternatively, you could have a budgeted amount for your online purchases and use prepaid cards or gift cards.
Regardless of the method you choose to make your online purchases, remember that the main takeaway of the cash envelope system is to help you with your overspending habits.
Benefits of Using the Cash Envelope System
The main and most obvious benefit of using the cash envelope system is that it helps keep you on budget. You know exactly how much money you have to spend in each category, which helps you plan your daily activities more efficiently to ensure you stay within budget.
But it does have other benefits too. For example, if you run out of money in one or more categories before your next payday, you know that you need to make changes in your lifestyle to help you stay on budget and live within your means. It also discourages wasteful spending because people naturally spend less when they use cash. It’s harder to let go of the money when you’re physically handing it over.
The cash envelope system will also help you learn how to be more responsible with your spending, another benefit that can translate into more savings. Because you can see where every dime goes, you will think twice about spending your money, making it easier to change your spending habits to better suit your financial situation.
Things to Consider When Using the Cash Envelope System
Using the cash envelope system will prevent you from overspending because when the money is gone, you’ll have to wait until you get paid again to spend more. Therefore, you can’t overspend and go over budget.
However, for this system to work, you do have to be realistic when making your budget. This means that you may have to make a few adjustments to the categories or the amounts of money you put in each envelope until you have a system that works for your household. If you know you spend at least $250 for groceries, don’t underestimate it when you’re making your budget to give you extra money for another category. It’s vital that you estimate your income and expenses as closely as possible.
When using the cash envelope system, be patient. It takes time to change your spending habits, but if you follow the rules and stick with it, this system will work. Not only that, but you’ll be able to save more money and be a step closer to reaching your financial goals.
Have you tried the cash envelope system? If so, what did you like about it? I’d love to read your comments below!
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