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Stop wasteful spending now by learning how to make a cash envelope system.
The cash envelope system is all about building discipline through budgeting. It’s perfect for those who give in to the temptation to spend too easily and want to change their habits. The basic idea is to force yourself to only use a certain amount of money for a certain category. For example, if you set a budget of $100 per paycheck for eating out, this system ensures that you only have access to $100 – no more, no less – for that category of spending.
The first step of any budgeting plan is to evaluate how much money you make and how much you want to spend on what.
For the cash envelope system, budgeters often calculate income by paycheck instead of by month. This makes it easier to split up all of the money as soon as you get it. Ask yourself how much you take home every paycheck after taxes. Once you get an exact number, you can move on to step 2.
If you freelance or have other sources of income, make sure you add these into your calculations.
Estimated time: 5-10 minutes per paycheck
How will you divide up your income?
Say you get a paycheck every two weeks. What are the needs you have to cover during the two weeks following your paycheck? What percentage of the check do you want to spend on groceries? Rent? Fun stuff? Come up with a use for every dollar, and don’t forget to include savings.
Always leave room for indulgences. Creating too strict of a budget means it will be easy for you to get frustrated and give up.
Estimated Time: 30 minutes – 1 hour per paycheck
Now it’s time to create the namesake of this system: the envelopes.
Make it fun and get creative! It will make this budgeting process a lot less boring. Here’s a guide to making your own envelopes at home.
Label each envelope with the category you want to spend the money on. If it helps, add the amount as well. Then find a safe place to store the envelopes. You could use a mini accordion folder, a filing system in a safe, or any other method that will help you stay organized and keep your cash protected.
Want to teach your kids about money and have craft hour all at once? Invite your kids to help you create your envelopes. Explain what they are for and how the cash envelope system works while you DIY as a family.
Estimated Time: 1-2 hours
Go to your bank and cash/withdraw your paycheck as soon as you can.
This should be the easiest part. You’ve already decided on your budget and made your envelopes for each category. Now all you have to do is divide the cash.
TIP: Double check your work when you’re done. You don’t want to accidentally overspend because you put too much cash in one envelope!
Estimated Time: 20 minutes
Follow this rule or the whole cash envelope system falls apart.
This is why it’s imperative to be realistic when you’re deciding on your budgets for each envelope. You have to create a system you can follow. Be honest with yourself.
If you want to make the system more portable, you can buy a cash envelope system wallet that has dividers to separate your cash.
Note: You can still use the cash envelope system online.
If you don’t want to actually take cash out of the bank, you can still use this form of budgeting.
Basically, you follow all of the same steps except you use each envelope to store a list of all of your purchases and their totals for that category. You can also just use a spreadsheet. The biggest issue with using this system online is that you can still use a debit or credit card when you’re over-budget, unlike when an envelope runs out of cash.
Pros and Cons of the Cash Envelope System
This method may sound pretty foolproof, but there are some things you should consider before switching.
Pros of the Cash Envelope System
- Knowing exactly when you’ve used up your budget
- Paying upfront, meaning you never miss bills
- Thinking more about how you spend your money.
Cons of the Cash Envelope System
- Having to go to the bank and withdraw cash
- Missing out on credit card points
- Getting confused when categories overlap.
Think this could work for you? Try the system for yourself. You will build discipline with your money, and this can be a great method for working your way out of debt. Good luck!
Article last modified on July 5, 2022. Published by Debt.com, LLC