How to Use Cash Envelope System for Budgeting

If you’re looking for a money saving strategy, look no further than the cash envelope system.

I’ve been using the cash envelope system since I got married and absolutely love it. It gives an extra nudge to control spending and helps to always have money on hand for different non fixed expenses.

This system has not only helped me stay in check but it has helped me keep and meet my savings goals throughout the year.

What is the envelope system?

The envelope system uses envelopes to store cash for specific expenses. These expenses are usually non fixed expenses such as groceries, gas, entertainment, dining, clothing etc.

The purpose of the envelope system is to help limit the use of credit and debit card purchases. It helps you become more in tune with your spending.

Many people don’t take into account their little purchases and therefore don’t realize how much they are actually spending on the little items and how much it adds up.

How does it work?

Let’s say you know you need to stop spending so much money during the week on restaurants, and you have set your budget for restaurants at $25 per week ($100/month).

You would get an envelope and label it “restaurants”. If you get paid twice a month, you can take $50 out when you get paid the first time in that month and put it into that envelope and then when you get paid the second time, you can take out the other $50.

That’s how much you can spend for that month and you repeat the process each month. You are not to spend any additional money outside of what is in that envelope.

Here are the steps:

1. Create a monthly budget
2. Decide which expense categories you will use for the envelope system. I would recommend the non-fixed categories that you struggle the most with keeping yourself in check when it comes to spending.
3. Acquire enough envelopes for each of these categories. You can purchase any regular envelopes large enough to fit cash in it or get them from your bank.
4. Label the envelopes with the categories of choice
At pay period once a month, take enough cash out to cover the expenses of these categories.
5. Put the allotted money of the budgeted amount in the each envelope
Spend sparingly
6. Repeat steps 5-7 each month

What to do if you don’t spend all of the money:

You don’t have to spend it all. You can keep adding money to the envelope and set it aside at the end of the year for something else such as savings or to pay off debt.

Using money from another envelope to cover for expenses:

Although I wouldn’t recommend it, life happens. This is completely acceptable, just don’t make it a habit.

Tip:

Make sure you budget enough to keep you from swiping your card or moving money around. This is why it’s important to look back at past expenses, evaluate how much on average you send and then set yourself a budget that you are comfortable with and can afford.