You’ve probably heard of the cash envelope system; it’s nothing new. But unless you’ve put this budgeting strategy to use in your own household, you may not know the details of exactly how it works and how it can help you gain control of your finances. Read on for a step-by-step guide on how the cash envelope process works.
The basics of the envelope system
The cash envelope system is not just one envelope stuffed with cash. Rather, your budget gets broken down into various categories. Each category has corresponding envelope. Inside, each envelope holds the allotted amount of cash for a specific category.
The magic in this system is that you always see how much you have, on any given day, in any given category. There’s absolutely no room for confusion—you have the cash in the envelope, and that’s it.
How to use the envelope system to budget
The key strategy with the cash envelope system is to map out those broad categories of spending that really make or break your budget. Look at where most of your money goes week after week; it’s likely categories such as housing, groceries, gas, restaurants and possibly clothing or entertainment.
You can start the envelope system at any time; there’s no need to save up money to get rolling. All you need to do is budget for each of your categories, go to an ATM and make a withdraw, and then put cash in each envelop at the beginning of the month. For example, if you know you need $125 for gas every month, take out $125 in cash at the beginning of the month, place it in your “Gas” envelope—and that’s it! Each time you buy gas, you’ll turn to that envelope for funds.
The envelope system works if you have the discipline to only use the cash allotted to each category. For example, if you run out of money in your “Clothing” envelope, you can’t turn to your “Grocery” envelope and supplement it. Or, if you planned to spend only $100 at the store and your bill comes to $115, then you’ll need to put a few items back on the shelves.
It’s all about discipline and sticking to the budget you’ve created for yourself. When you’ve worked through your cash each month, it’s gone. It’s a very real, tangible way to track your spending and see exactly where you are on any given day.
Have leftover cash, or an emergency?
Should you be lucky enough to have leftover cash at the end of any month, that’s fantastic. It’s okay to treat yourself! It’s okay to do something you enjoy, or you can roll the extra cash over into the next month. It’s your call.
Should an emergency occur where you absolutely need extra cash, you can work through it. If you have a spouse or partner, work with them to re-budget as necessary. If you do not have a partner, perhaps you have someone in your life who can help you to be more accountable. This person could be a friend or family member who you trust. Talk to that person and shift your budget as you need to.
The bottom line is that using envelopes for cash will dramatically curb your overspending and impulse spending. The envelope system forces you to think ahead and spend—with a purpose.
Take control of your money and improve your life.
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