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The Cash Envelope System Ultimate Guide – If you’ve been looking into how to budget, chances are you’ve at least heard of the cash envelope system. But you might not know the ins and outs of how it works or what benefits it can offer you. It’s a great system and has stayed around for good reason.
What’s great about the cash envelope system is that you can start it right away. You don’t need to run out and buy a bunch of items for it. All you really need is envelopes from around the house and cash (and maybe this nifty Budget Keeper).
Please note that before you can implement the cash envelope system, you must already have a budget in place. If not, you first need to learn how to create a budget.
How The Cash Envelope System Works
Let’s assume you are paid twice a month and that your grocery budget is $400 for the month. On the first payday of the month, you should withdrawal $200 from the bank. Go home and put that $200 in an envelope marked ‘groceries’. Repeat this again with the second payday of the month. You now have your $400 for groceries for the month.
The only thing you can spend the cash on is groceries – nothing else. You cannot use a debit card or a check. If you forget the envelope at home, go back and get it. Once the cash is gone, there is no more spending for the rest of the month. You have spent all of your budget. It’s game over.
Repeat this method for all other crucial budgeted categories. Examples include gifts, clothing, gas, eating out, and self-care.
How To Create A Cash Envelope System
First, you need to list all your expenses for each payday, as the cash envelope system is designed to carry you from one payday to the next. Again, we’ll assume you are paid twice a month. What expenses will you have to cover between your first and second payday of the month? When doing so, it’s always a good idea to check your calendar for any out-of-the-ordinary events. Maybe there’s a graduation to attend or a dinner date with a friend. You can’t forget to include these expenses. In this case, you would need to allocate more toward ‘eating out’ and less toward ‘groceries’.
Once you have determined your expenses, go to the bank and take out the total amount of cash you need to cover expenses until the next payday. Organize the cash by category and place it in it’s rightful envelope.
What About Bills?
Chances are, you have lots of fixed expenses. (Fixed expenses are due the same day every month, for the same amount.) These could include mortgage, rent, car payment, cell phone, and insurance. For me, I set all of these bills on auto-pay and I pay them from my checking account. Everything aside from fixed expenses will need to be withdrawn in cash from the bank. This keeps things simple, and simple is good.
What Envelopes Should I Use?
The good news is that just about anything can work. You can use plain, white envelopes from the dollar store – but color-coded envelopes really work best. Or you could make your own out of construction paper. If you want something a little more hip, use a cash envelope template and print it at home. Using color-coded envelopes help save time and keep things less complicated. Find what works best for you and be sure to label each one with a category.
What If I Do Everything Online?
One of the great things about the cash envelope system is that it gives you a physical restraint on your spending. The cash is tangible and provides a visual to help keep you accountable. But, it won’t work for everyone’s circumstances. Sometimes, a cashless envelope system is a better alternative. This is one of those times.
A cashless envelope system uses the regular method – just in a different way. Instead of using cash, you use your debit card. That’s really the biggest difference. You still use envelopes and separate them into categories. A budget is set and you track your spending on the envelope. Make sure to write down the expenses at the time they are paid. Be careful not to overspend.
It does take more discipline, as it’s easier to get carried away with a debit card. There’s nothing physical for you to rely on. But motivated, the cashless envelope system might be a great fit for you.
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Setting Yourself Up For Success
Honestly speaking, it takes time and practice to conquer the cash envelope system. It takes discipline – especially if you relied heavily on everything but cash before this. You can do it! You just have to be willing to put in the work and stick to it. That’s the hardest part.
No one else can create your budget for you. And no one can force you to stay with the cash envelope system. It has to come from within and you have to want it. Like, really REALLY want it. In time, it gets easier and becomes a part of your every day life. You just have to hit that boiling point with your finances.
Set yourself up with a ‘miscellaneous’ envelope. This will catch you if something unexpected happens or if you forget about an event. You will probably fall back on this a lot in the beginning. Use it – that’s what it’s there for.
To succeed, nail down where you struggle so you can make the changes. Do you find yourself cheating with a debit card or check? Leave them at home. Do you overspend in one category and take from another to ‘make up’ for it? Take the other envelopes out of your purse and leave them at home, too. Get rid of the temptation.
If you’re looking into the cash envelope system, then I am guessing that you are sick of your financial situation. We have all been there – including me. Sometimes you just wake up one morning and realize that something needs to change. This is your chance to make that happen. There is no better time to set your finances straight. So label your envelopes and start holding yourself accountable.
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