Are you tired of feeling like your money slips through your fingers faster than you can earn it? Or perhaps you’re looking for a more hands-on approach to managing your finances? Enter the cash envelope budgeting system – a tried-and-true method that puts you in control of your spending like never before.
Let’s start with the basics. The cash envelope budgeting system is a simple yet powerful way to manage your money. It involves allocating cash into designated envelopes for different spending categories, such as groceries, entertainment, or dining out. Once the cash in an envelope is gone, that’s it – no dipping into other envelopes or swiping cards.
Why Is The Cash Envelope System Effective?
The beauty of the cash envelope system lies in its simplicity and discipline. By assigning specific spending categories and allocating funds accordingly, you gain a clear picture of where your money is going. Plus, it forces you to be mindful of your spending and prioritize your expenses based on your financial goals.
There’s also something to be said for the psychological effect the cash envelope system has which can be used with the simple budget 50/30/20. Many studies have shown that people spend more with plastic than when handing over cash. When you’re forced to hand over physical cash you feel it where as the plastic card is given right back to you. It doesn’t register in our minds that we have given something up.
Let’s say you’re at the local grocery store picking up the essentials. You set a budget of $200 and after about 30 minutes of collecting your groceries you see that surprising number pop up $297. After a moment of shock and a sick feeling in your gut you swipe that plastic card so you can worry about it another day. Studies have also shown that impulse buys at groceries store and on Amazon are some of these worst offenders. There’s something so tempting about seeing food on a shelf, your mouth might start to water a bit and all you have to do is put that chocolate in the shopping cart.
The cash envelope system helps to prevent situations like these because you have a physical envelope of $200 when you walk into the grocery store. It forces you to be mindful and count up the cost of each item in your mind as you walk through the grocery store. The fear of being embarrassed by not having enough money at the register is also a reminder to be mindful of your budget in the grocery store.
How To Start The Cash Envelope System?
Getting started with the cash envelope system is easier than you might think. Begin by identifying your income sources and listing essential expense categories. Then, determine how much you want to allocate to each category and divide it into physical envelopes or create virtual envelopes using budgeting apps or software. I recommend using the simple budget 50/30/20 to divide up the money.
Some people choose to use a binder with envelopes inside, each labeled with different categories such as rent, groceries, utilities, entertainment, dining out, etc. This method keeps everything together and neatly categorized. Personally, I prefer a simpler system where I keep the money for fixed expenses, such as rent and utilities, in my checking account. Then, each week, I allocate myself an allowance in cash, which I keep in my wallet with a separator in the middle. One side is for essential groceries, and the other is for personal spending and entertainment.
Online purchases can be a bit tricky with the cash envelope system, but they must be addressed. Amazon makes it so easy to make a one-click impulse buy for something worth $30, and poof, it’s gone! If you’re struggling with this, I have two options that will help.
- Option 1: Remove all credit cards from Amazon so that you cannot impulse buy items. Just having the extra barrier of having to input the card information will help you take a pause before spending.
- Option 2: Remove all cards except for your debit card. Whenever you want to make a purchase you will have to physically drive to you bank and deposit cash to pay for the items you want off Amazon. It’s another physical barrier to help precent impulse buys and spending over your budget.
Tips for Success with Your Cash Envelope System
To make the most of the cash envelope system, be sure to regularly review and adjust your budgets as needed. Involve your family members in budgeting discussions to ensure everyone is on the same page. And don’t forget to celebrate milestones and achievements along the way – financial success is something to be proud of!
Set Clear Spending Categories: Define specific categories for your expenses such as groceries, utilities, entertainment, dining out, etc.
Allocate Funds Wisely: Determine how much money to allocate to each envelope based on your income and spending priorities.
Use Physical Envelopes or Digital Alternatives: Choose between physical envelopes or digital equivalents like budgeting apps based on your preference and convenience.
Label Envelopes Clearly: Ensure that each envelope is clearly labeled with its designated category to avoid confusion.
Stick to Your Budget: Once you’ve allocated funds to each envelope, commit to only spending the money within its respective category.
Regularly Review and Adjust: Periodically review your spending and adjust your budget as needed to reflect changes in your financial situation or priorities.
Plan for Irregular Expenses: Set aside money in separate envelopes for irregular expenses such as car repairs or medical emergencies.
Utilize Spare Change: Save spare change in a designated envelope to use for small purchases or to add to savings.
Be Flexible: While it’s important to stick to your budget, be open to adjusting it when necessary to accommodate unexpected expenses or changes in circumstances.
Celebrate Milestones: Acknowledge and celebrate your progress and achievements along the way to stay motivated and committed to your budgeting goals.
Involve Family Members: If applicable, involve your family members in the cash envelope system to promote transparency and accountability in spending.
Stay Disciplined: Remember that discipline is key to the success of the cash envelope system. Resist the temptation to borrow from other envelopes or overspend in any category.
Track Your Expenses: Keep track of your spending either manually or through digital tools to ensure that you’re staying within your budget limits.
Use Cash for Discretionary Spending: Reserve cash for discretionary expenses like dining out or entertainment to help control impulse purchases.
Review Your Progress Regularly: Take time to review your progress towards your financial goals and make any necessary adjustments to your budgeting strategy.
Comparison with Other Budgeting Methods
While there are many budgeting methods out there, the cash envelope system stands out for its simplicity and effectiveness. Unlike the 50/30/20 rule or zero-based budgeting, which rely on tracking expenses electronically, the cash envelope system offers a more hands-on approach that resonates with many people. Personally, I use a hybrid approach using the envelope system and the 50/30/20 budget which I find to be highly effective. Check out our Budgeting 101 article to learn about some of these other budgeting options.
If you’re ready to take control of your finances and stop living paycheck to paycheck, the cash envelope budgeting system is worth considering. By assigning specific spending categories, allocating funds into envelopes, and sticking to your budget, you can achieve your financial goals and enjoy peace of mind knowing exactly where your money is going. So why wait? Start your cash envelope system today and take the first step towards financial freedom.