First of all, you need to study your expenses, and then create categories for each month. By setting a spending limit for each of the categories, you can understand how much you can spend.
Recently, more and more people are getting into budget planning as it is a great way to manage money. One of the most popular budgeting methods is a cash envelope system. If you like to visually see your budget, then this option will be the most suitable for you. Moreover, a cash envelope system also often leads to cost savings.
Although this system is not suitable for all people, it will still be a great option for those who want to know exactly where this or that amount was spent. So, in this article, you can learn what the cash envelope system is and how to use it to stick to your budget.
What Is Cash Envelope System?
The name “cash envelope system” speaks for itself. You will need to put money into different envelopes which will be named as budget categories. By making a list of your expenses, desires, and goals, you can understand how much money you need to put in a particular envelope.
Let’s say you decide you can spend $200 on entertainment this month, and after payday, you put that amount in an envelope. Thus, you can only spend this amount until the next paycheck, you cannot take the amount from another envelope and spend it on entertainment.
Most often, people use the cash envelope system to pay for variable expenses, such as groceries, entertainment, shopping, and so on, while Mortgages, utilities, and others are already included in your monthly budget.
What Impact Will The Cash Envelope System Have On Your Finances?
As already mentioned, this system helps people limit themselves for a month and monitor how much they spend in a particular category. While people usually just pay for purchases with a card and forget that the money was spent, with the cash envelope system you will only have a certain amount to spend.
Moreover, people spend more when they use the card, because they do not physically see how much money was spent. However, the physical transfer of money most often has a sobering effect on people, and they begin to understand that this or that amount could be spent on other needs. Moreover, you will need to constantly check how much money is left in this or us envelope, which will teach you responsibility. So, you will most likely be less likely and less tempted to spend money if you see it disappear from your envelope.
Watching your envelopes makes you more likely to turn down an impulse purchase or going out to a restaurant with friends knowing that you’re already over budget and don’t have the money for it. This way, next time you will be more frugal, knowing that you may not have enough money to have coffee with a friend.
3 Ways to Use Cash Envelopes
Of course, in order for the cash envelope system to help you manage your budget, you need to know how it works. First of all, you must understand that each budget is unique, so you yourself must indicate the amount that you can spend for a particular category. It is also important to understand that the amount you put in the envelope also reflects your goals and values. If you choose to put $500 in the “entertainment” envelope and $200 in the “savings” envelope, you won’t be able to raise the amount you need quickly because you misidentified your needs.
It is also important to stop comparing yourself to other people when planning your budget, because they may have completely different goals and plans. Moreover, you should not limit yourself too much, as this will only break your will faster and you will return to impulsive spending.
Of course, at first, it will be difficult for you to get used to the fact that you cannot mindlessly buy yourself a new sweater or go to a restaurant. However, after a while, you will realize that you are taking an important step towards your financial stability. What’s more, the cash envelope system may be a much more appropriate budgeting tool for those people who have already tried everything they can to save money.
So, if you are serious and want to change your budget planning once and for all, here are some top tips to help you manage your expenses:
- Create a budget.
In order to start using the cash envelope system, you first need to create your budget. Remember that it is important to understand how much you spend in order to put the correct amount in a particular envelope. Otherwise, you will not have enough money and you will find this system ineffective. When drawing up a budget, it is important to understand that it will have to be adjusted periodically as you will need to adapt to new expenses that you cannot foresee.
Start budgeting by tracking your expenses. In order to determine the correct amount for a particular category, you must know where your money goes. Study bank and credit card statements to get a more accurate picture.
Also, determine how much you can afford to spend each month. Subtract your regular monthly needs from your salary and you will have an amount that can be spent on variable expenses.
- Create categories
Once you know how much you spend, you need to create spending categories for the month. This includes, for example, restaurants, gas, groceries, entertainment, beauty, hobbies, clothing, and more. Next, you will need to set a limit for each category based on your analyzed spending. Base your limit on how much you can truly afford to spend.
- Fill the envelopes with money.
Once you’ve set the categories and limits, you’ll need to put your money in envelopes and get going. Constantly check how much is left in a particular envelope so that by the end of the month you will not be left without money. Treat the cash envelope system responsibly to gain financial independence and confidence in the future.