Back to the Basics: The Cash Envelope System

Cash in Envelope

Sometimes all it takes to get back on track is to stick to the basics. When was the last time you paid for a purchase in cash? Do you typically carry cash with you? In this day and age, we favor convenience over cash. Credit cards and apps are people’s typical payment methods, but it may be a little too easy to spend. There is something about the tangible nature of paying for an item with cash that encourages you to pay attention and see your hard-earned money going toward a charge or bill. If you’re struggling to stick to a budget and save, the cash envelope system can be a great way to re-familiarize yourself with your finances. Below are some steps to help you get started along with some pros and cons of the system.

  1. Start with your budget. Before you start color coding envelopes and pulling out cash, you need to develop a budget that allows you to use the envelopes.
  2. Track your spending. After you’ve developed a budget, review past bank statements and being to organize your spending. Saving your receipts and keeping an expense tracker will also be helpful ways to get an accurate picture of your financial habits.
  3. Categorize your spending. Next, it’s time to sort your purchases into categories to help you determine how to label your envelopes.
  4. Separate fixed expenses from variable expenses. Expenses can be broken down into two different types, fixed and variable. Fixed expenses are your regular bills such as rent, car payments, and internet bills. On the other hand, your cash envelopes will be suitable to manage your variable expenses. Variable expenses are your purchases that fluctuate month-to-month such as clothes, groceries, and household items.
  5. Establish limits for each category. Based on your spending habits and trends, determine a value for each cash envelope. Then, make envelopes labeled with each spending category.  
  6. Determine when you will pull out cash.  After you’re created your envelopes, set a plan to set your envelopes in motion. A good time to withdraw cash for your envelopes is typically when you get paid.
  7. Only use cash in each envelope for each category. When you’re starting out with the cash envelope system, focus on using only the cash you have in each category. If you end up having extra cash and need to adjust your budget, try to re-establish at the beginning of the month instead of swapping cash between envelopes.

For more details on how to get started, visit https://www.thebudgetmom.com/how-to-start-using-the-cash-envelope-method/.

Pros of a Cash Envelope System:

+ Track spending more efficiently

+ Get a better sense of your spending habits

+ Visibly see exactly how much cash you have left to spend within your income limits

+ Tangible way to restrict your spending and make sure you don’t overspend

+ Reestablish the concept of money with cash instead of plastic.

+ Less likely to spend wastefully and make impulse purchase

+ Helps you establish a goal and be motivated to stay on track

Cons of a Cash Envelope System:

– Must carry a lot of cash

– Miss out on credit card rewards

– Must coordinate shared cash with different family members

– Categories can be difficult to stick to when you visit a store that pulls from different envelopes

Despite some of the cons, a cash envelope system is worth a shot! It can be an easy way to not only keep track of your expenses but also help you stick to your budget and reach your financial goals.

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