If you’re struggling with money or you’re wanting to manage your finances better, then learning to control spending is one of the toughest challenges you’re going to face. However, if you’re serious about getting your financial life in order, then learning how to use the cash envelope system will save you thousands of dollars over the course of the next few years and it will play an integral role in helping you manage money better.
The cash envelope system is a money management tool that will:
Basically, instead of making purchases with a credit card, debit card, OR writing a check, you instead only use cash for those purchases.
The cash envelope system is only to be used for discretionary spending items/categories. “Discretionary” simple means that you have a choice in the amount of money that gets spent on that particular item or category. So, for instance, here are all of the different categories (and envelopes) that we have in our cash envelope system:
Something that’s important to understand is that the cash envelope system must be modified to meet your life and budget. For instance, many of my clients buy their groceries, hygiene, and housing products at the same store. If that’s the case for you then you may want to consider having all of those categories as part of one envelope. For my household, we typically shop at different places for each of those things so it makes more sense for us to split them up.
Also, some of you may have to add an envelope or two. For example, if you have children you may want to include an “allowance” or “commission” envelope. If you have teenage kids then you can have an envelope for the money you’re going to give them each month for their spending or gas.
1. Get on a budget.
Without a budget it’s impossible to know how much you can allocate to each cash envelope. If you’ve never budgeted then start with the principles of budgeting and walk through that budgeting series.
2. Determine which categories need to become cash envelopes
See my list above as those are the most common categories (less “dry cleaning”) in the cash envelope system.
3. Go buy some envelopes
This isn’t called the “cash envelope system” for no reason. Each category has a separate envelope with it’s own money. Write the name of the category on the front of the envelope and use use that cash envelope only for its designated category.
4. Determine how much cash each envelope should get
It’s important to understand that it takes 2-3 months to really get this part right because there is no “perfect” amount for every family out there. So, with that in mind, you MUST test it out and see if the amount you allocated works! If you’ve never budgeted before, then use these average budget numbers to get started and adjust from there. When determining the amount each cash envelope should get, think in terms of monthly amounts.
For instance, if you’re a family of 5 (husband/wife with 3 kids under 10) then consider starting your grocery envelope with $500/month. At the end of the month, if you have money left in your cash envelope system then try starting with $450 next month. However, if you discovered that $500 didn’t work, then increase it to $550 next month. Do this for each cash envelope category.
Lastly, if you go to the grocery store once/week and budgeted $500 for the month, that doesn’t mean you have to take all $500 with you. Simply take $150 for that week and leave the rest in the envelope system at home.
5. Determine when to withdrawal the cash each month
Everybody’s budget will vary, but if you make a decent amount of money (and have a relative low amount of cash expenses), then you might be able to take out all of your cash and fund your cash envelope system with the first paycheck of each month. If you get paid every-other week, then consider splitting up the monthly total and taking it in two equal amounts on your pay dates. If you get paid weekly, then split the monthly cash envelope total by 4 and withdrawal 1/4 of the cash each time you get paid.
6. Make it work and stick to it
The cash envelope system isn’t some perfect, flawless system that will work for every family out there. Some people prefer to avoid using cash completely and opt to maximize their budget by taking advantage of the best credit card rewards offers available. With that said, mold the envelope system to fit you and your family. If you’re hesitant about using cash envelopes for all of your spending categories, then start with one item such as groceries. Test it out for a month or two and see if you like it. If you do, then slowly transition other categories to the envelope system.
Finally, if you’re going to use the cash envelope system, then stick to it! The sole purpose of the envelope system is to ensure you don’t overspend on a particular category (as your cash serves as your monthly limit). So, it’s pointless if you’re going to blow through your cash and use your credit card or debit card once you’re out of money.
Most people throughout the world fail to pay attention to how much they spend each day, week, and month. We’ve become accustomed to swiping our debit or credit cards and it doesn’t dawn on us how much we’ve spent until we look at our checkbook (or online checking account) and see that we don’t have any money left!
Solution: the cash envelope system. You’ve taken the time to establish a budget so that you can determine how much you CAN allocate every month to each envelope category. Once you’re on the cash system then you’re making it a habit to withdraw the cash at the beginning of each month, where you begin spending it as needed. You spend the cash freely, but you remain cognizant that it’s supposed to last you the entire month! Once the money is gone, you’re out of cash for that category until the next month begins at which point you’re allowed to go back to the bank to get more.
The cash envelope system has worked wonders for the WSL house. We first got on the system nearly 5 years ago and it has forced me to be disciplined and to learn to say “no” to my friends and family (and myself) when we run out of money. Learning to control spending is an integral step to paying down debt, building savings, and getting your financial life in order, and the cash envelope system will help you get there!
Readers: have you tried the cash envelope system? Did it work for you?
The articles are written by personal finance enthusiasts (not certified professionals) based on their personal experience. What works for them may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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