The cash envelope system is a proven way to save money and stick to a smart budget. It is quick to set up and easy to manage, but it takes dedicated willpower to make it work. For those who are serious about taking control of their money, the cash envelope system cannot be beaten for effectiveness.
The cash envelope system our grandparents used is so effective because it eliminates overspending. Income is divided into budget categories which are funded with cash and stored in envelopes. Cash in envelopes is spent only on the funded budget category. This method eliminates impulse spending.
Setting up a budget can be daunting at first. With patience and some trial and error, you can set up a budget and cash envelope system for yourself that will reward you with greater financial prosperity in the future. A great budget makes your money work for you. Read on to learn more about the cash envelope system and why it is so effective.
Cash Envelopes Eliminate Impulsive Spending
When you hand a plastic card to the cashier, it is disconnected from the real money that you are spending. When you hand physical cash to the cashier, there is a level of accountability and pain that is not present in the plastic card.
- Spending cash gives you a level of discomfort when spending money that is necessary to trigger an impulse to save.
- Swiping a card does not deliver an immediate response.
The plastic card may deliver pain later, in the form of a bank statement or credit card statement that makes you feel miserable, but by then, it is too late. Spending cash makes you think twice about that candy bar in the checkout or that sweater that is on sale. Cash makes you think harder about what is in your basket at checkout.
Cash Envelopes Require An Effective Budget
An effective cash envelope system requires a realistic budget. This budget can be set up in a digital spreadsheet or on notebook paper. The important thing is to make sure you specifically line-item all of your monthly bills and debts.
- Housing: This includes your house payment or rent payment
- Taxes: Property taxes, business taxes, or self-employment taxes
- Insurance: Health insurance, life insurance, and property/renters insurance
- Groceries
- Fuel or transportation costs
- Clothing
- Vehicle Maintenance
- Gifts: Be sure to include all holidays and upcoming events, not just birthdays.
- Debts: Credit card payments, school loans, and every other monthly debt payment you may have
In order to guarantee that your envelope system is effective, you need to make sure that all your categories of spending are covered in the budget. Then decide which categories are best paid digitally. These will likely be items that are best paid online, such as a house payment, insurance payments, and utility payments. Everything else is most effectively managed with cash budget envelopes.
Types of Funding
There are two major types of envelope budgeting systems. The most traditional and strict form of cash envelope budgeting involves cashing all income and using cash for every transaction. While this is the most effective form of cash budgeting, it can be difficult to keep up with. People using this strict cash method will take cash to the utility company to pay the bill, and so on.
The other option is a hybrid system. Since the digital revolution, most people have adopted a hybrid form of cash budgeting that allows for online bill pay, but cash-only on discretionary spendings such as groceries and gifts. This is a less inhibitive form of budgeting but can be less effective because of the greater flexibility.
Pros of Cash-Only Budgeting
Below are the many pros of cash-only budgeting.
- Higher accountability
- Greater personal connection to funds
- Simple to track
- Low or no technology use needed
- Difficult to spend money online
These advantages will keep you on track with a strict budget, but they can be difficult to maintain since they require you to give up a lot of modern conveniences.
Cons of Cash-Only Budgeting
Below are the cons of cash-only budgeting.
- Not convenient for bill paying in today’s age
- Less flexible overall
- Risk of cash getting lost
Less flexibility can be good when you want to rein in your impulse buys. It can be a negative in many other aspects, though. It might be dangerous to have all of your money available in cash form when cash is physical and can be lost or stolen.
Pros of Hybrid Cash Budgeting
When you need greater flexibility than cash-only budgeting can offer, a hybrid form of cash budgeting might be just the thing. Below are the pros of using a hybrid form of cash budgeting.
- Greater flexibility
- Allows for online bill pay
- Strict on discretionary spending
- Makes use of digital resources
- Some funds can be kept in the bank
- Allows for online shopping
This is the most common modern use of cash budgeting. In today’s age, many people own credit cards that require online bill pay. Using cash for everything can be very inconvenient.
Cons of Hybrid Cash Budgeting
Even today, though, there are still cons to the hybrid cash budgeting system.
- Less accountability
- Easier to overspend, especially online
- May require tech to implement
- Requires greater willpower
These drawbacks come down to self-control. When you use a hybrid system, you have to exercise restraint with digital funds. Ensure you have enough money to pay your bills online and ensure your discretionary funds are in cash form.
Drawbacks of Digital-Only Budgeting
There are budgeting apps available that allow you to do a completely digital budget. These apps are much less effective because it is too easy to simply move the numbers around from one budget category to another. This makes it easy to overspend and then “steal” from other budgets to cover impulse spending. If you choose to do a digital-only system, consider adding a friend or partner to help with spending accountability.
The cash envelope system for budgeting helps you to get up-close and personal with your income and spending habits. Overspending cash is much more emotionally painful than overspending on a plastic card, and it is much more difficult to cover up and shift money around. This makes a cash system much more effective in getting control of your money.
Manage Spending Cash Versus Saving Cash
Your budget will include categories for spending cash and categories for saving cash to be spent later when the need arises. The spending envelopes will go with you as you buy groceries, fuel, etc., and will only be refilled when you receive more pay to fund your budget.
The saving envelopes will usually stay home in a safe place, and you will add to them over time as you pull money out of your budget to build up these cash funds. Cash fund envelope categories may include:
- Savings funds
- Clothing funds
- Gift funds
- Travel funds
- Entertainment funds
- Vehicle maintenance funds
Be sure to add these items to your budget and pull a little cash out each time to fund these cash envelopes. Then when the time comes to spend on these items, you will have an available stash to use, and you will not feel helpless when the need arises.
Having a healthy savings stash either in the bank, in cash, or both will give you the confidence that you can handle unforeseen expenses and circumstances without resorting to your credit card. A healthy amount of savings is an indispensable focus for someone seeking to budget effectively and have healthy control over money.
Effectively Funding The Envelopes
Before you go to the bank for cash, plan out how much of each kind of bill you need to fund each envelope in your budget. Make a list that includes the total amount that you are going to withdraw, plus how many bills of each denomination. This takes time, but it is necessary to correctly fund each envelope.
- Label each envelope with the budget category. Whether you need five envelopes or 15, take the time to label an envelope for each line item.
- Count the exact amount of cash that you budgeted for each category.
- Store the cash in the appropriate envelopes.
- Store the envelopes in a safe place.
When you go grocery shopping, take only your grocery envelope. When you go to buy gas, use only money from your gas envelope. Did a friend just send a wedding invitation? Bring a gift, but spend only from your gift fund envelope. This discipline is necessary for making the cash envelopes work for you.
Tracking Cash in the Envelopes
Use a simple plus/minus system to track the amount that you have in each envelope so that you do not have to recount often. This is especially important for the savings funds envelopes. As you use a little and refund, keep a running total on the outside of the envelope for quick reference.
Some people like to use spreadsheets for tracking each envelope fund. Others like to use a budget app to track the physical cash. This particular method can be seamless if you find an app that works well for you to enter receipts for each category.
Conclusion
While setting up a cash envelope budget system can seem daunting, it is the most effective way to take control of your money and make it start working for you. When you are not tracking the cash and telling it where to go, it has a way of slipping through your fingers without notice.
Setting up a strict but adequate budget takes time and patience. You probably will not get it right the first few times, but with trial and error, and a willingness to change it up where it is not working, you will find a budget that works great for you. This method of managing your cash will inevitably leave you with more cash in the long run.
Sources:
https://www.ramseysolutions.com/budgeting/envelope-system-explained