If you’re having trouble getting a hold on your spending, you will likely benefit from learning about and using the cash envelope system. The cash envelope system is a great way to get a hold of your finances. It gives you control over your money and allows you to tell your money where to go. Many people have paid off thousands of dollars in debt using this system.
Is the Cash Envelope System effective?
One of the reasons using cash works so well is that it helps ensure that you are living within your means and within the stated budget amounts you set for each spending category. I think that once you start living with this system and paying cash, you’ll find it a much more organized way of managing money and building wealth. Here’s how the cash envelope system works.
Start With Your Budget
Learning to use the cash envelope system starts with reviewing your budget. Looking at your budget, highlight the expenses that are variable; that is, expenses that fluctuate every month.
Common Envelope Categories:
Since these types of expenses have the tendency to fluctuate each month, it’s easy to spend much more in these areas than you budget for. The cash envelope system will help you to gain control over fluctuations in your variable spending categories.
Make Envelopes Labeled with Each Spending Category
Grab an envelope for each variable spending category. Write down the name of each category on an envelope.
Some people write the amounts of each transaction during the month on the envelopes as well. If you think that would be helpful, give it a try. It might be beneficial for you to see exactly where your cash is going each month so that you can make adjustments to your spending if you feel they are needed.
As for me, I just write the total amount of cash that goes in the envelope as a quick reference for how much to put in there every month. Either way works; it’s just a matter of finding which way works best for you and your money habits.
Stuff the Monthly Cash Amounts in the Envelopes
Add up the total in cash that you’ll need to fund all of the envelopes for the month, then go to the bank and make a cash withdrawal. Your budget should dictate how much cash you need to put in each envelope. For instance, if you have budgeted $300 for groceries, then put $300 in the Grocery envelope. After you withdraw the money from the bank, take the budgeted amount of $300 and put it in the envelope labeled “Groceries”. Then do the same for each of the different envelope categories you have created.
Only Use the Money in Each Envelope for That Category
This step is key to success with the cash envelope system. For example, it can be tempting to use money from the grocery category to go to the movies once you’ve run out of entertainment funds, however, then you will likely not have enough money left to eat for the rest of the month.
Using the system successfully will likely take some trial and error. It will take some discipline to use the money in the envelopes only for what you’ve designated it for. If you come to realize that a budget set for a given category isn’t realistic, discuss it with your spouse and consider adjusting that category.
If you don’t have a spouse, consider finding an accountability partner. Find someone who is going to help you stay on track and that you trust. Then meet with them at least once a month to go over your finances to talk about how you’re doing on spending and goal achievement.
Have a Goal in Mind
When you are using the envelope system, it can be extremely helpful to have a goal that you are trying to attain. This could be to pay off your student loan, to pay off your car or mortgage, or even to save for your kids college savings.
As a part of our goal, I like to take any extra cash that we had left over at the end of the month in the envelopes and put it toward our goal. Keeping this goal in mind helps you to remember why you don’t want to overspend and gives you motivation to stay within your budget.
Common Questions About the System
Understandably, it can be nerve-wracking to do things differently, and to start using the cash envelope system in place of using a debit or credit card is no different. Here are some common questions and/or fears that people have about the system, and what we’ve learned in terms of the answers.
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