Budgeting techniques are constantly evolving, with new approaches being developed and old ones being adapted as technology changes. But sometimes, the simplest of methods is all it takes to help you take better control of your finances. Here’s a closer look at one such method—the envelope system.
Cash Envelope Budgeting
The cash envelope budget is a tried-and-true way to allocate your monthly earnings. This method involves physically portioning out your cash income into various envelopes, each designated for a different expense. The envelopes are categorized and labelled according to those monthly expenses—groceries, gas, date nights, clothes shopping, and so on—and how much you’ll need to keep in the envelope to cover each one. Then any time you spend money, you pull only from the corresponding envelope, refilling them after each paycheck to maintain the balance according to the amount each one needs.
The cash envelope system is an effective way to avoid overdraft fees and excess debt since you’d be relying upon the cash you have rather than a swipe of your credit or debit card. You’ll know exactly how you’re spending your income and better understand where you can adjust your habits and your budget according to your larger financial goals.
Much in the same way you would start any budget, you must first better understand how your income is being divided each month. Identifying your various expenses, and how much you tend to spend on them, can help you decide what envelopes you need, how you’re going to categorize them, and how much you should budget for each one. You can be specific with these categories, having one for morning coffee and another for your dinners out, or you can be more general, simply having one for food and another for entertainment.
However, because the system relies upon physical cash, you can’t necessarily use it to track your expenses that are pulled directly from your bank account (mortgage or rent, utilities, streaming services, online shopping). Instead, you could use a spreadsheet or virtual app in conjunction with the cash envelope system to track those expenses digitally.
After you have all your envelopes ready, you’ll need to go to your local bank or ATM to pull out the necessary cash. You can do this after your next payday, simply getting the amount that you need to build up your cash amount. For example, if you want to budget $300 for your monthly grocery bill, and you’re paid biweekly, then you would put $150 in cash into the envelope after every payday.
Once your envelopes are totally filled, you can then spend the cash from them according to your categories. If you’re grabbing coffee one morning, you’d take out the money from your “dining out,” “coffee,” or “splurge” category. Then, come your next payday, you’d count how much is left in the envelope, if any, and see how much you need to add to it to get it back to the full amount. You would then refill the envelopes, possibly only partially if you didn’t spend all the cash from a category that month or pay period. You can choose what you do with a surplus of cash, whether it’s save it for a larger purchase, put it back into your bank account for an emergency fund, spend it on a treat for yourself, or add it to the envelope anyway so you have more you can spend the next month.
Adapt the System According to Your Needs
As with other budgeting techniques, you can change this method according to your own needs and goals. You could rely upon the cash envelopes for categories that you’re actively trying to spend less on, physically limiting yourself to the cash you have on hand. Spending only cash would then allow you to literally see how much you have to spend and what you can spend it on. This can help you practice smarter habits and spend less on things you might not actually have the budget for.
This article was prepared by ReminderMedia.
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