Making a budget and sticking to it is a constant struggle for many. And if you’ve been trying (and failing) to do both, learning the cash envelope system might help.
I know it’s nothing new. But the rise of budgeting apps and similar digital methods probably made us forget this simple yet effective technique.
So, here’s a refresher of what this method is all about, its benefits and the steps you need to apply it.
What is the Cash Envelope System?
This method involves putting money into labelled envelopes according to your budget categories. How much cash you put into each is up to you.
What’s important is to allocate enough money for every spending category until you can refill the envelopes.
The budget categories included for the cash envelope system are your variable expenses, not the fixed ones.
Examples of variable categories are your household supplies, grocery shopping, beauty products and recreation plans.
On the other hand, fixed categories are your insurance, utilities, mortgage and car payments, or expenses deducted automatically from your account.
Who Should be Using the Cash Envelope System?
This budgeting method may not work for everyone, though. However, I recommend this technique for:
- Credit and debit card users. Paying with physical cash somewhat creates an emotional response that can help curb overspending and impulsive buying.
- Budgeting beginners. This method gives you an idea of how much you spend and save.
- Traditional budgeters. Some people want to see exactly where their money goes. The cash envelope budgeting system also works for those who prefer the hands-on approach when managing their finances.
What are the Benefits of the Cash Envelope System?
You might be wondering what makes the cash envelope budgeting method different or better than other strategies. Here are some of the gains you get when you try it out.
It gives you spending freedom.
Most budgeting methods aim to limit your spending to save money. It’s logical yet too restrictive, making it harder for us to stay on the budget track.
In contrast, the cash envelope system makes money easily accessible. And calculated spending is way better than no spending at all.
That leeway then makes the method more doable and realistic.
It jump-starts your emergency savings.
Budgeting with physical money makes you more conscious of unnecessary expenses. You also become motivated to make even small savings with every budget cycle.
You can then transfer the extra cash to your emergency fund envelope. And once you’ve saved enough, you can then create a bank account for it.
This way, you’ll be reinforcing the family’s financial footing, ready for unforeseen circumstances.
It makes your budgeting efforts more tangible.
Creating a budget involves putting your spending under control and saving more. But it’s hard to do that when you habitually make online or credit card payments.
You don’t see or feel the damage until you sit down, look at the receipts and compute. Actual cash payments, however, make things more transparent.
Once the money in the envelope runs out, it acts as an instant alert that you need to stop spending more and fine-tune your strategy.
It disciplines you.
The cash envelope system can do more than improve your spending habits and boost your savings. For instance, it can positively change our overall attitude, lifestyle choices, decisions and work productivity.
A renewed outlook on the value of money can also motivate us to make excellent investments and more defined financial goals.
How Do I Start My Cash Envelope System?
Before applying this method, keep in mind that your system will be unique from others. You might put in more cash for your travel, while others will put the same amount for their clothing envelope.
Also, do not be too restrictive in the first few months. Give yourself time to adjust. What’s important is you keep at it and iron out the wrinkles along the way.
Ready to try this technique? Here are the steps to get you started.
1. Track your spending for an entire month.
This one is a good starting point, especially if you do not have a clear picture of where your money goes. When you do this, subtract your fixed expenses from your monthly income.
The leftover cash will be for variable spending or your budget categories. Variable expenses fluctuate, so try tracking them for about three months to get an average.
You can complement this with a spending journal if you like. That way, you avoid putting too much or too little into each cash envelope later.
2. Identify your specific budget categories.
For beginners, usual cash envelope categories include groceries, restaurant dining, gas, clothing, entertainment and personal items.
Later on, you can expand it by adding more categories like car maintenance, pets, hobby, vacation and gifts.
People generally manage five to seven budget categories for their cash envelope system. Keep in mind that too many envelopes make budgeting less feasible.
On the other hand, too few envelopes might be unrealistic and only lead to overspending. So, assess your spending priorities well and make sure to cover the essentials.
As for the kind of cash envelope to use, it’s up to you! You can stick to plain white envelopes or be creative with colourful construction paper.
You can also purchase a more durable cash envelope wallet if you like.
3. Set spending limits for every envelope.
Start putting in cash for each envelope according to your honest expenditure tracking in Step 1. The key here is to allocate cash limits based on what you can afford, not what you want to spend.
Any budgeting technique will work once you begin living within your means. Now, if you find this a bit impossible, getting a side hustle can help boost your income.
4. Establish your cash envelope system cycle.
Once you start doing this method, remember that your goal is to stick to it. To help you do that, create your cash envelope routine.
For example, make it a habit to refill your envelopes once a month or after each payday. Then avoid making unnecessary charges when withdrawing cash from the machine, too.
Lastly, decide on your next steps if you emptied one envelope or have extra money after the cycle.
5. Adjust and repeat.
Your budget categories, spending limits and cash envelope routine are, of course, not set in stone. As you’re dealing with variable expenses, it’s pretty impossible to nail everything on the first try.
So, stay open for tweaking needs here and there, then try again.
Honestly, there is no best budgeting tactic created just yet. But any technique, like the cash envelope system, will work for as long as you want to save and spend less.
So, make sure to realise the need first before deciding on which budget system to try. That way, you’ll be more driven to make it work and succeed.
These detailed steps for starting a family budget plan should inspire you more!