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A cash envelope system can be an effective way to budget for anyone that needs a visual budget to stay on track. Not only will this method help keep your spending in check, but it might also lead to less spending overall. In fact, studies have shown that spending cash may lead to spending between 15 to 20% less!
Although this budgeting method will not work for everyone, it can be a great option for anyone that needs to see exactly where their money is going.
We will dive into exactly what the cash envelope system is and how you can use it to stay on top of your budget.
What is the cash envelope system?
The cash envelope system is exactly what it sounds like. You put your cash into different envelopes based on the budget categories. You’ll decide exactly what amounts go into each cash envelope based on your spending goals.
For example, you might put $300 in the grocery budget and $150 in the fun budget. The key is that you’ll only be able to spend the cash out of these envelopes for the specific budget category until the next cycle of your budget.
The categories are only meant to encompass your variable spending. This includes things like beauty, household supplies, groceries, and fun. However, your fixed expenses such as your mortgage or car payment are not meant to be included in your cash envelope budget. You can continue to pay these fixed expenses as you normally would.
How the cash envelope system can transform your finances
With the cash envelope system, you’ll be able to easily see how much you are spending in each category. Instead of simply swiping your debit or credit card and forgetting about it, you’ll be forced to hand over cash in exchange for your purchase.
The physical action of handing over cash can make you stop to think about exactly how much you are spending in the checkout line. It is a more tangible process to spend cash as opposed to plastic funds. As you spend down the money in each cash envelope, you’ll be forced to watch your cash funds dwindle.
Simply seeing where your money is going can be a transformative process. You might be less likely to overspend when you can see your cash flying out of the envelope. For example, you might skip an impulse buy towards the end of your shopping trip because you know that you only have so much money to spend on that category each month. If you have a habit of overspending, then the cash envelope system might be a useful budgeting strategy to try.
How to use the cash envelope system
When you first start to develop your cash system, it is important to remember that every budget is unique. You have the freedom and flexibility to choose your cash amounts for each category.
With that, the amount of cash you place in each envelope is a reflection of your personal values. So it will likely be different than anyone else’s. For example, you might put a large portion of your cash into your ‘hobby’ envelope while others may put a large portion of their cash into a ‘pet envelope.’ Don’t compare yourself to others because you are the person who will need to stick to the budget.
Also, don’t try to restrict yourself too much at one time because you might be more likely to break your resolve.
It can feel like a complicated process for the first couple of months. But once you get the hang of it, you might find it infinitely more effective than your previous budgeting methods. The key is to stick to the plan and work out the kinks for the first couple of cycles.
If you are intrigued by the idea of a cash envelope budget, then read on. We will outline exactly how you can get started with this budgeting strategy.
1. Get a handle on your budget
The first thing you need to do is create your budget. In order to successfully use your cash envelope system, you’ll need to do create a successful budget. If you put too much or too little cash into your envelopes, your whole financial life might go haywire.
It’s not difficult to build a budget for yourself, but it is important to understand that you’ll likely need to tweak it over time. Life changes as you grow and you’ll need to adapt to new expenses as they arise.
To start building a successful budget, you’ll need to track your spending. If you have no idea where your money goes each month, then you’ll need to start here. You can track expenses by combing through bank statements and credit card statements or saving your receipts for later. It is a good idea to track your expenses for at least a month. To get a more complete picture of your variable expenses, you may want to track your expenses for three months.
In addition to tracking your expenses, you need to determine what you can actually afford to spend each month. Take a closer look at your income after taxes to ensure that you are creating a budget that you can actually afford. After determining your post-tax income, determine how much of your income needs to cover your fixed expenses such as your mortgage.
Once you’ve subtracted your fixed expenses from your post-tax income, you’ll know exactly how much money you have leftover for variable expenses. You can make envelopes to encompass each of your variable expenses.
2. Look at the categories of your spending
Once you have tracked your spending for at least a month, you can separate this spending into categories. Find out how much you have spent in each category.
A few variable expense categories you may want to include are:
- Anything else that needs to come out of your variable expenses.
After you’ve determined how much you’ve spent in each category, make sure that you can actually afford this level of spending. It might surprise you to find out that you’ve spent more than you’ve earned in a given month. If you’ve spent more than you’ve expected, then the cash envelope system could be the perfect solution. It will force you to think about your spending before you make the purchase.
As you move forward with the cash budgeting system, think of it as a fresh start. Don’t beat yourself up over past spending mistakes. Instead, look towards the future and work towards your financial goals. Whether you want to pay down debt or build your savings, a cash budgeting system can help you to achieve those goals.
3. Set limits for each category
Next, you’ll need to set spending limits for each of your variable spending categories. Start with what you are able to spend in a given cycle, then take your previous spending into account. Base your spending limits on what you can actually afford, not what you would like to spend in a given category.
If you’ve consistently spent more than your income, then your new spending limits might seem harsh. However, living within your means is critical to long-term financial wellbeing so it is important to be honest with yourself about this.
If you cannot stick to the spending limits, then it might be time to start thinking about a flexible side hustle to supplement your income.
4. Fill your envelopes with cash
After you’ve set your spending limits for each cycle, filling your cash envelopes is the easy part. You can choose to fill your envelopes with each paycheck or once a month. Find a cycle that works best for you and try to stick to it. Make sure to avoid any unnecessary ATM fees while taking out cash.
Once the money is in designated cash envelopes, you’ll need to diligently spend out of the appropriate categories. If you have leftover money at the end of a cycle, then you can roll it into the next cycle or put it into your savings.
5. Adjust as needed
As you continue to use your cash envelopes, it is important to realize that you may need to adjust along the way. In fact, adjusting your budget along the way should be an expected part of the process. Don’t expect to nail your spending restrictions on the first month.
Some categories might seem overly stuffed while others are ambitiously slim. Although it is all variable spending, you want to keep your spending caps for each category relatively close to what you need each cycle.
Throughout the process, you might uncover hidden spending habits that were destroying your budget. You may also find that you are more thrifty than you thought! When you are pressed against the cash restriction, you might find that you are suddenly more willing to try a DIY fix instead of throwing cash at your problems.
If you find that the cash system is not working for you but the budgeting categories are helping then consider another option. You may want to switch to a ‘virtual envelope’ system instead of a cash system. Be aware of your own preferences and build a budget that will encourage you to stay on track.
Where to find your cash envelopes
The cash envelope budgeting system is a very popular approach to getting a handle on your budget. Due to this popularity, you have many choices when it comes to carrying your cash in these envelopes. Here are a few places to look:
- Plain white envelopes. Of course, you can go with the standard white envelopes. After all, if your ultimate goal is to save money then this is an affordable option. You can get 500 plain envelopes for around $20 on Amazon.
- Amazon. Many Amazon sellers offer colorful envelope options to keep your budget cheerful. Our favs are these amazing ones from the budget keeper for under $10.
- Etsy. Etsy offers a multitude of fun cash envelope options to make sure your budget stays fun. You can find an option that works with your style.
- Make it yourself. As a final option, you can choose to make fun cash envelopes yourself. After picking out some fun paper from the craft store, you can fold your own envelopes and decorate to your heart’s content. Don’t be afraid to enjoy the crafting process. You might even be more likely to stick to the cash system if you’ve put in the effort to make your own envelopes.
Be sure to check our detailed list and review of the best cash envelope wallets.
If you are worried about how to carry your new envelopes in a fashionable way, don’t worry! You don’t have to leave these envelopes full of cash loose in your purse. Many stores offer cash envelope wallets that will allow you to stash your envelopes in addition to your other wallet essentials. You can still have a functional wallet that offers an organized way to keep track of your cash.
The bottom line
The cash envelope system can be a great way to get your spending under control. If you are still struggling to stop overspending, then starting a spending journal might be the next step to kick your spending habits.
Budgeting is a very personal choice. Although the cash envelope system isn’t right for everyone, there is a way to budget that will work for you. Consider taking our course to build a budget that works for your lifestyle today.