Personal Finance
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10 mins read
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December 03, 2021
What is the Cash Envelope System?
Ever heard of the cash envelope system where you use physical cash and envelopes to efficiently save money? Let’s take a closer look at how it works.
In a world of digital payments and online shopping, we seldom need to use physical cash now. This comes as a relief to those of us who consider ready cash an incentive to compulsively spend money.
But what if you can use physical cash to efficiently track your monthly expenses and prevent overspending? This is exactly what the cash envelope system recommended by
is all about. Let’s take a look at it in detail.
What is the Cash Envelope System?
Simply put, a cash envelope system is one in which you set aside specific amounts of cash in envelopes and then limit your expenditure to only what is present in these envelopes.
Instead of complicating your
process by using charts and spreadsheets, you simply store your money in envelopes allocated to each budget category, such as food, clothing, and recreation, and make sure you only spend the amount in these envelopes.
The basic agenda of this kind of system is to track your expenditure in each area of monetary needs, which otherwise becomes quite difficult when all your cash is tucked away in a single space or when the transactions are made online.
Though unknown to many, the cash envelope system is one of the best paths to leading a
lifestyle and can most often keep you from
.
Who is the Cash Envelope System Right For?
While the cash envelope system can benefit anyone, it is not a necessity for everybody. If you feel you are financially stable and do not have to fix budget categories and limit your expenditure to a minimum, it might be futile to spend time dividing your cash between envelopes.
The system is best suited for people who cannot afford to go overboard with their expenses, such as college students and daily wage workers, or anyone who simply wants to
. The cash envelope system is also an excellent method to give your child lessons in budgeting and saving money.
How to Set Up a Cash Envelope System
Here are a few simple steps that you can follow in order to set up your own cash envelope system.
Come Up with Budget Categories
The first step is to decide your budget categories. While you may fix a category for each of your monetary needs, it is more viable for you to limit yourself to the categories where you generally tend to overspend. A few of the usual categories are:
- Groceries
- Gifts
- Entertainment
- Wellness
Set a Budget for Each Category
To set a budget for each category, you need to refer to your expenditure from the previous month and see how much you usually spend on each. Hence, it may be better to take a month to observe and record your expenditure before you begin following the cash envelope system.
If you have a family, make sure all members are on the same page when it comes to the budget allocated to each category. You don’t want to go through all this trouble, only to discover later that someone in your family is not ready to limit themselves to the set budget!
Fill the Envelopes Allotted to Each Category with Cash
This step is self-explanatory. Buy cash envelopes, or make ones on your own, and write the name of one category on each of them. Make sure you don’t borrow from one envelope just because it is within arm’s reach.
Though you may promise yourself to later replace it with cash from the category the expense actually falls under, a single mistake can quickly undo a lot of your efforts.
Limit Yourself to the Cash in the Envelopes
This is where you start facing problems. “What do I do if I run out of cash in one of the envelopes?” is a very frequent question. But however tempting it might be to refill your envelopes or borrow from one of the others, doing so would only destroy the aim of the system itself.
The best way forward if you run out of cash is to
in that particular category for the rest of the month. In addition to motivating you to spend wisely in the upcoming month, this can help you figure out where you have gone overboard and reduce one or two expenses in that particular category.
Having an accountability partner to hold you to your budget helps prevent overspending, too. This could be a friend, a family member, or a coworker who understands your agenda and is ready to help you.
Cash Envelopes: Pros and Cons
As evident from what we’ve seen so far, this system has numerous benefits. It helps you encounter the reality of your financial situation and bring it under control. It forces you to a disciplined budgeting system without leaving any doors open for overspending. Most important of all, the system gives you lessons in saving and holds you back from financial crises.
Unfortunately, the cash envelope system has its setbacks too. One of the most unfortunate setbacks is that it is difficult for you to apply the system to online transactions. In such cases, you would have to note down the amount you allot to each category, record the balances after each expense, and make sure you don’t use beyond what you’ve written down. The last step becomes even more difficult as the account holds more cash than what has been allotted to each category.
In addition to this drawback, the system takes time in setting up and requires you to carry the envelopes everywhere you go.
Also, unlike
, sharing envelopes with other members of the family can become confusing.
Nevertheless, there is not one among these setbacks that cannot be overcome with a little hard work and a strong mindset.
Tips on Following the Cash Envelope System
Finally, here are a few tips that could make following the system a little bit easier for you.
Remember, expensive brands are not the only good ones
Advertisements have a way of convincing us that only the top brands are worth purchasing. But with a little research, you’ll be able to find local brands that are affordable and still serve the purpose. Falling back on such affordable brands can help you save a lot, thereby allowing you to have a reasonable experience within the budget allowed by your cash envelopes.
Find fun activities that don’t break the bank
Following the cash envelope system does not mean that you have to keep yourself from every opportunity for recreation. While you may have to hold back on the expensive ones, there might be numerous others that would fall under the budget, and even ones that are completely free.
Reward yourself if you come under budget
Living stingy may be depressing at times and can bring you close to dropping out of the plan after just a few months. Only a strong mindset and unwavering determination can help you hold on. While a strong mindset is something you need to build on your own, occasional rewards and treats may help in building motivation.
Coming way under the budget is one occasion that calls for a reward, but one that is within reason. You can also choose to deposit the extra cash in your bank account and take pleasure from watching your
grow.
The cash envelope system is a perfect fit for anyone who is ready to minimize their expenses and live stingy so as to save up or avoid a financial crisis. If you happen to fall under this category, we hope we’ve helped you plan and set up an efficient system that will suit both your budget and your lifestyle. Good luck!
Gopika K A
Gopika is an English honors graduate from Kerala. A writer by passion and a perfectionist by spirit, she'd choose the fictional world over the real one any day.
