If you’re looking for a budget to get your finances under control, you might have heard about the cash envelope system, the envelope method. Keep reading for more information about this tried and true method to see if this is the budget option for you.
What is a Cash Envelope System?
The cash envelope system is a way to budget your discretionary spending visually. Like most budgeting methods, you have to use financial discipline, plan out your purchases and the purpose of your money.
However, what sets the cash envelope system apart is that instead of swiping your debit card or credit card, you are using cash to make your discretionary purchases.
When you see that your money is not coming from somewhere “invisible”, most people think twice when they actually see the money that they’re spending. Here is more information about where to find cash envelopes for budgeting.
Creating your Cash Envelope System
Now that you know what the envelope system is, where do you find cash envelopes for budgeting?
There are plenty of free and lost cost options to get started.
Let’s take a look at some free or DIY cash envelope templates. If you don’t want to spend a lot of money on getting started, here are some suggestions:
If you don’t want to go the DIY or printable route, you can buy cash envelopes. There are a lot of beautiful, low cost options available. Here are some of the best, highly rated cash envelopes.
Whatever route you go, don’t make it too complicated. The goal is to simply obtain envelopes to put your cash in so you can get started.
Quick Start Guide 101 For Cash Envelopes
Pin it down and get it done!
Creating A Budget
You’ll need to create a budget if you don’t already have one. Budget are simply plans for your income or money. The cash envelope system simply won’t work without a plan.
The first step is to get familiar with your spending habits. Analyze your bank statements and receipts to see what you regularly spend money on in a month. You may want to go back up to 3 months to get a clearer, historical picture of your expenses and buying habits.
The second step is to list all your expected and fixed monthly expenses.
Fixed monthly expenses are bills that generally stay the same each month. They are likely needs, things you cannot live without. Examples of this include:
- Mortgage or Rent
- Insurance (Health, life, car)
- Car Payment
- Utility bills (electricity, water, etc)
Next, list your discretionary or variable expenses. These are unpredictable and change depending on your use of the product or services. They can also vary because they are not costs set in stone. Examples include:
- Dining Out
- Personal Care
- Gifts for holidays or birthdays
Categorize Your Expenses
For those of you wondering how this method of cash envelopes for budgeting can affect your fixed expenses, know that this method does not mean you need to take cash out of the bank to pay your mortgage. We are going to categorize our discretionary spending with these envelopes.
Continue to pay your fixed expenses as normal, so that means you can continue with automatic bill pay or paying these bills online.
The money that you have left over after your fixed expenses can now be categorized into the spending categories for your cash envelopes.
Each category will get its own cash envelope.
Once you have identified your categories, you will need to set a limit for how much cash will go into that particular cash envelope.
How Much Cash Should I Put In A Cash Envelope?
That answer will be specific to your lifestyle, expenses, spending habits and income. The research you did while reviewing your spending habits over the past 1-3 months to create a budget will give you the amount you usually spend on a category.
Example: You review your bank statements for the past 3 months and noticed that on average, you 60 dollars a month on getting your nails done. For your envelope labeled “Personal Care” you would set a limit of 60 dollars.
Getting used to paying for your expenses with cash can take some adjustment, especially if you’ve been used to using your debit or credit cards in today’s cash-less society.
As with any budget, you may run into some issues until you get your personalized system perfected and running smoothly.
These are quick fixes to some common questions that may arise from using cash envelopes for budgeting.
What If I Run Out of Money In My Envelope?
Before you grab money out of another envelope, wait! Take a moment to consider why you even started the cash envelope method to begin with. This system is meant to control your spending.
If you are constantly facing the decision to steal from one envelope to cover another category, then it’s time to rethink your budget. Meaning, that the amount you’ve allotted for that category is not sufficient or realistic for your spending habits.
What If There’s Money Left Over?
If you have money left over at the end of the month, way to go! What you do next depends on your personal finance journey. You could reward yourself with an extra meal out, splurge on entertainment like a concert or live event or maybe get that bag or dress you’ve wanted.
The other alternative is to use that money to pay down debt. Not as fun as option 1, but it would be a great use for your extra funds.
How to Handle Emergencies Using the Envelope System
It’s no surprise that life can be unpredictable. Even the best laid plans can go off track and something happens you didn’t account for.
If you’ve built up an emergency fund, now would be the time to use this in a bind. An emergency fund would prevent you from needing to spend the cash in your envelopes.
If you don’t have an emergency fund and need to use the cash in the envelopes, take a little solace or comfort in that fact that the cash in your envelopes are not meant to be used to your fixed monthly expenses or bills.
If you need to use your cash for an emergency this month, you can always regroup on next month’s budget.
Will You Try The Cash Envelope System?
You won’t perfect this system the first time you use it and maybe not even on the second or third attempt.
Disciplined spending doesn’t happen overnight, it does take time and effort. Keep your eye on the prize and your money goals!
This belongs on your money board, save it!