The cash envelope method is a way to keep track of expenses and know exactly how much money is spent in budget categories during the month.
Once you have budget categories, you take an envelope for each category and put money in each corresponding envelope. The money in each envelope is what you use to pay for that category during the month.
Therefore, it is important to always keep track of your expenses. The hard part is sticking to your budget no matter what. If you need more money, you must discipline yourself not to get into separate envelopes.
What Is Cash Budgeting?
The cash envelope system will help you keep the budget. You need to create cash envelope categories for the cash envelope, such as groceries, gas, household items, etc.
Each category has a budget, and the envelope shows a certain amount of cash – this is money that you can spend over a certain time.
When you need to purchase in a certain cash envelope category, you use the cash from the envelope. Using a cash wallet will help you keep your budget under control.
Once you’ve spent all the money in your envelopes, you won’t be able to spend anything else in those cash envelope categories until the next month. (Or until your next paycheck if you distribute cash to your cash envelopes every pay period.)
Extra Cash in Envelopes
If at the end of the month you have money left in envelopes, you can:
- Add to the amount of cash you put aside for this cash envelope next month (for example, you can add it to your grocery budget).
- Deposit into a savings account to increase your reserve fund.
- Pay off credit card debt.
- Spend money on entertainment (if you have enough money to cover all expenses and pay bills).
Cash Envelope Categories of Cash Envelope System
Cash envelope categories are individual envelopes that represent different types of monthly expenses. They are part of the Envelope Budgeting System (also called the Envelope Cash System) where you organize your budget.
There are 2 types of cost classification: variable and fixed costs. Variable expenses are expenses that can fluctuate from month to month. And fixed costs remain the same from month to month.
Variable Expenses Include Things Like:
- Products
- Gas and transport
- Personal hygiene
- Dine out
- Hobby and leisure
- Entertainment
- Travel
- Animal care
The purpose of using cash envelopes for variable expenses is that you can use other methods to pay regular bills.
Fixed Monthly Expenses Include:
- Rent and mortgage payments
- Utility bills
- Mobile phone bills
- Internet accounts
- Insurance premiums
- Car payment
- Monthly credit card payment
- Student loan payments
Cash envelope categories are all expenses that are not fixed or are not subject to automatic payment.
For example, if you spend too much money on food, you can create an envelope for that category only and control spending and stick to a certain amount.
How To Create a Cash Envelope Budget?
Add Monthly Income
Before you can start using the envelope method for budgeting, you need to know your monthly income.
This includes all the money you expect to receive in a month.
You can also include any one-time sources of income you expect to receive during the month, such as tax refunds or discounts.
Select Cash Envelope Categories
The next step in envelope budgeting is choosing which cash envelope categories to include in your budget.
Cash envelope category ideas:
- Products
- Auto fuel and oil
- Cloth
- Dine out
- Entertainment
- Personal hygiene
- Animal care
- Housewares
- Gifts
- Fun money
Determine the Budget Amounts for Each Envelope
Once you have determined your income and selected cash envelope categories, you need to decide how much money to allocate to each of the envelopes.
Spend Money on Every Envelope
Once the money has been allocated to each envelope, put your budget to work by spending it on expenses.
Each time you take money from an envelope, subtract the amount from the total. This allows you to keep track of how much you have left to spend in each envelope.
For the envelope budgeting system to work, you need to spend only the money that is in the envelope. Once that money runs out, you won’t be able to spend anything else until a new budget month starts.
How Many Cash Envelopes Should Be?
It is recommended to have 5 to 9 cash envelopes to cover all cash payments and expenses.
Don’t make too many envelopes, as this will make organizing difficult, take you a long time, and eventually make you feel overwhelmed and give up.
Advantages of Cash Envelope System
It works!
If you only pay for things in cash and you run out of cash, you can’t overspend.
Able to discipline
We all need discipline in our lives to make us better, whether it be our spending habits or our eating habits. The more you practice discipline, the easier it is for you to take responsibility for other areas of your life that you want to improve.
Use as a reserve fund
Today, many people use plastic, which can be a problem in the event of an emergency.
Therefore, in emergencies or other situations, it is possible to use the money from the envelope.
Your budget becomes tangible
Credit cards can easily lead to overspending. When using cash in an envelope, you will be better able to navigate your budget.
There is no overdraft fee
If you set aside your debit card and use cash instead, you are much less likely to get an overdraft and charged fees.
Less wasteful spending
When using the envelope budgeting system, you carefully consider each purchase.
Don’t miss a payment
With an envelope budgeting system, you pay upfront and you don’t have to keep track of anything.
If you’re in doubt about whether to use cash envelope budgeting, then consider your current spending habits.
If you’re already disciplined in keeping track of your expenses, switching to envelopes might not be too difficult.
Also, consider where you typically spend the most and whether it makes sense to pay in cash instead of using a debit or credit card.
FAQs
How does the money envelope system work?
The Envelope System is a way to keep track of exactly how much money you have in each budget category for a month by keeping your money in envelopes. At the end of the month, you can see how much money is left by taking a quick look at your envelope.
How many cash envelopes should you have?
In general, most people need 5-7 cash envelopes of cash to cover their variable budget expenses. Having too many envelopes makes it difficult to organize cash envelopes and carry them around. Too little can mean you’re missing out on general cash envelope categories of spending and may overspend.
What do you label budget envelopes?
Using one envelope for each expense category, write the name of each category and the amount of your monthly budget on the envelopes.
If you are paid weekly or bimonthly, divide the total monthly amount for each category by the number of pay periods in each month and write the figure on the envelope. This will help you put the correct amount from each paycheck into the envelope.
What is one downside to of using the cash envelope budget?
The disadvantage of using a cash envelope budget is that it is difficult to use cash for many accounts, including any purchases made online. The second downside is that you need to carry physical envelopes of cash with you (unless you’re using the app). The third disadvantage is that the process is laborious and tedious, and it is also easy to forget about expenses. And the last drawback is the need to withdraw cash.
Is there a money-tracking app?
Money Manager Expense & Budget is a popular budgeting app for both iPhone and Android. After manually entering all your income and expenses, the application generates various daily, weekly and monthly reports to help you easily control your expenses.
Conclusion
Using the cash envelope system allows you to know exactly which cash envelope categories of cash envelopes will benefit you the most so that every month your budget is successful.
This way, you will be sure that you will not overspend and will not get into debt.
To properly create cash envelope categories, you need to evaluate your budget and choose recommended cash envelope categories.
Once you start using the cash envelope system, you will save money! No more living paycheck to paycheck!
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