Person putting money into an envelope

How to Budget With the Cash Envelope System

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Having a budget is essential. Budgeting is a financial tool that has never been more important. And, it is the only way for you to achieve financial security and stability.

One budgeting method called the envelope system divides your discretionary income into categories. Each category is assigned a set amount of cash each payday, and that’s all you have to spend on that category until your next paycheck.

Because you use cash, you can only spend what you have. If you spend all the money in one envelope, that’s all you have for that category, so you’ll have to stop spending.

This type of budgeting will force you to stick to a certain amount of spending per category – but that money will last longer.

Cash makes it impossible to overspend, and this helps you stick to a budget.


What is the Envelope Budgeting System and How Does it Work?

Budgeting is important. With the envelope system, you can track your expenses, save more money, and get a sense of control over your finances. In this system, you divide your discretionary spending into different categories, such as groceries and entertainment. Each payday, you then place a certain amount of cash into each envelope. 

You can even color-code them if you want or give them cute names that will motivate you to save money. You can be as specific or broad as you like. For example, you could create an “entertainment” envelope or an envelope for each such as eating out, movies, and concerts.

Let’s say each payday, you budget $200 for groceries. You put $200 in your groceries envelope. When you go to the grocery store, $200 is all you have to spend. If you spend more than that, you’ll need to put something back.

When paying for something, use money from the appropriate envelope. 

Other categories for this type of budgeting include things like:

  • Eating out at a restaurant or entertainment.
  • Specialty beverages.
  • Gas.
  • Hobbies.
  • Gym memberships.
  • Vacations or travel.
  • Grooming or beauty expenses.
  • Clothing.
  • Holiday gifts.

Benefits of the Cash Envelope Budget

There are many benefits of this budgeting method. It’s hard to avoid overdraft fees and debt when you use your debit card or credit card. Using cash instead of debit or credit cards is a great way to keep track of your available funds. If you physically divide up your money, it’s much easier to see how much you have to spend on an item, which can help you avoid impulse purchases.  

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Woman putting dollar bills into an envelope

How to Start a Budget With Cash Envelopes

Now that you’re ready to start using this budgeting method, here are four steps on how to start.


Step 1: Review Your Expenses and Draft Your Budget

The first thing you’ll need to do is review all of your expenses and create your budget. By reviewing your expenses and building your budget, you’ll be able to see your spending habits.

You should also set up all your fixed expenses like your mortgage, electric, car payment, cell phone, and cable bills to autopay. Putting them on autopay will ensure they are paid every month on time by being deducted directly from your checking account.

Once you’ve done this, it will give you an idea of how much you’ll have to withdraw each month for your envelopes.


Step 2: Set Up Your Categories and Dollar Limits

Now that you’ve figured out how much you spend each month, it’s time to start creating limits for discretionary spending and decide how much cash to withdraw.

Maybe you’re spending too much money on eating out, or perhaps you always spend more than expected at the grocery store. Either way, setting limits for the main categories where you spend your money will help you take control of your finances.

Here’s an example of how to figure out how much cash to withdraw:

Say you bring home $4000 each month. The amount of your fixed expenses deducted each month from your checking account totals $2500. This means you have $1500 left each month for your discretionary expenses.

So you would have to withdraw $1500 each month and break your discretionary expenses down like this:

  • Groceries: $700
  • Entertainment $200
  • Grooming $50
  • Gas: $100
  • Clothing: $100
  • Miscellaneous: $250
  • Savings: $100

These total $1500. You can add and subtract to each category, but you can’t go over $1500. Doing this helps you prioritize what’s important and where you really want to spend your money.


Step 3: Make Your Envelopes and Fill Them With The Cash

Now that you have your categories figured out and how much you’ll need for each, it’s time to make your envelopes and add your cash.

Label each envelope with a category. It’s also a good idea to color-code each one because it makes it easier to keep track.

Withdraw your cash and fill your envelopes.

Step 4: Repeat the Process

When you first start envelope budgeting, you may need to make some adjustments. For example, if you find that you don’t need as much for groceries but need more for entertainment, you can simply take cash from your grocery envelope and put it in your entertainment envelope.

Alternatively, you can remove some cash from another category and replace it with more money in the envelope for groceries. The only envelope you should not take from is savings. It’s best to decide on a set amount for that category and leave it alone if possible.

How Does the Cash Envelope System Help With Budgeting?

The envelope budgeting system gives you money management control. Being forced to stick to the envelope budget and using only cash makes you buy only what you really need. It’s pre-planning before shopping, not blind impulse purchases, so you can’t overspend with an envelope budget. 

Also, it creates good money management habits, so even if you no longer use cash to pay bills, the system still works and can be applied using software or other financial technology.

Final Thoughts

The cash envelope system is an excellent tool if you want to take charge of your finances and control your spending. It lets you set and stay within your budget for each spending category. By doing this, you can see where your money is going right in front of you and help you to save money.  

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