Budgeting With Cash On Hand: How Does The Cash Envelope System Work?
When you’re trying to get out of debt or you’re trying to save more money, managing your funds the old fashion way is something you might want to consider.
If you’ve researched different ways to budget and manage your funds, you’ve probably heard of the cash envelope system. This method is not new and has been around for a long time.
However, although it’s been around for a while, a lot of people still don’t know how it works or the benefits of using it.
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How The Cash Envelope System Works
The cash envelope system was developed by Dave Ramsey. This system works by forcing you to stick to your budget in different categories. It’s a method for setting and maintaining your budget by using cash for different spending categories in your life.
You use cash to control your spending. Once you run out, you stop spending in that category – sounds simple, right?
The good thing about the envelope system is that you can start TODAY.
The cash envelope system is very easy to attain and maintain. It’s a straightforward system that anyone can follow.
Keep Track Of Your Spending
Keep a list of your spending, save receipts, or organize a spreadsheet — whichever works best for you. We have created a free spreadsheet <— you can use.
Decide On A Budget
Before you start, first determine how much you have available after setting aside any savings and investments.
Once you know how much money you have left, categorize your spending. Break your purchases into categories and add up how much you are spending in each one.
For most, the spending categories are:
- Transportation (this include the gas for your car)
- Household Necessities
- Dining Out
- Pet Care
After you figured out which categories you need, set a limit for each one based on what you’re spending now. You need to decide how often you’re going to withdraw your cash.
For most, taking out the entire budget for the month is too much so instead, you can break your budget into two-week increments.
Stuff Your Envelopes With Cash
Make an envelope for each category. You can either buy ready-made ones or create your own.
You can use plain envelopes, card stock envelopes, or specially designed ones! There are also wallets or organizers with several dividers.
Write the category name on the front. After each payday, put the budgeted amount of cash inside the envelopes.
Stick To Your Budget
Once you run out of cash in one envelope, that’s it — you spent your budget for that pay period.
You cannot spend any more in that category. You can’t take cash from other envelopes, either. No cheating 🙂
Deposit What’s Leftover
When it’s time to fill your envelopes again, deposit whatever cash you have left in your envelopes into your savings account.
If you have any debt, use this money to pay it down. If you don’t have any debt, put that extra cash into another savings account.
Why A Lot Of People Are Trying This Method
The best part about the cash envelope system is that it really works.
If you’re only paying for things in cash, you can better track your spending. You can’t overspend. Once you run out of cash in one category, that’s it — you’re done and you need to wait for your next payday.
The more you practice this system, the more disciplined you become with your spending.
Less Wasteful Spending
Do you have those sinking moments when you realize how much you’re spending monthly? You bought two pairs of shoes the same color or you went to the grocery store to buy eggs, but, ended up with a cart full of junk food? That’s what this method will help you avoid.
When you use the cash envelope system, you are more likely to think through your purchases. Since your cash disappears right before your eyes, you’re less likely to have near as much wasteful spending.
No More Missed Payments
You can pay your bills on time and avoid the monthly fees you’ve been paying by being late.
Some Tips To Help You In Getting Started
Only Take The Cash You Need
If you budgeted $100 for eating out when you head out to eat, don’t take the whole $100. Take what you need from the envelope and leave the rest behind.
Budget By Paycheck
Although there are several ways to set your budget up (by the week, month, quarter, or by paycheck), it’s recommended doing it by paycheck. You can accurately plan your budget if you’re working within a pay period.
Adjust Your System
It may take a while for you to get everything set up. There might be several pay periods when you have less or more budget for different categories. Make adjustments, as needed, until you’re comfortable with the system.
Stick With It
The cash envelope system takes discipline. It might take some time for you to get the correct amount for each category. Have patience. The envelope budgeting system will definitely work for you, as it has for so many other people.
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Even while you’re still learning, the cash envelope system will help in handling your budget and finances better. You’ll feel accomplished knowing that you’re working at achieving financial independence, but, this method will definitely help you stick to your monthly budget.
Have you ever used the envelope budgeting system before? How did it work for you?