Do you ever tell yourself you're going to finally start taking control of your money and then a month goes by and you're still overspending?
That happens to the best of us. We swipe our credit card for those daily purchases and next thing you know hundreds of dollars are racked up.
If telling yourself you're going to stop overspending isn't working, maybe it's time to try something new. Something that will solve the problem for good. Something that WORKS!
That solution is called the cash envelope system.
Table of Contents:
- What Is the Cash Envelope Budgeting System?
- How Does the Cash Envelope System Work?
- Benefits of the Cash Envelope System
- Downfalls of the Cash Envelope System
- Should You Use the Cash Envelope System?
- How to Implement the Cash Envelope System
- How to Use the Cash Envelope System Electronically
What Is the Cash Envelope Budgeting System?
The cash envelope system involves is using cash to budget for certain expenses (typically the ones you overspend on).
How Does the Cash Envelope System Work?
When you start using the cash envelope system, you'll want to first pick some categories from your budget that you find yourself frequently overspending on.
Here are some commonly used cash envelope categories:
- Gift buying
- Dining out
- Fun money
- Online Purchases
Emergency Envelope Guidelines
I also recommend adding an emergency envelope. It's optional, but here's why I think it's useful:
The original rules for the cash envelope budget say that you should never move money from one envelope to another. I understand why this rule exists, but I think there are situations where you may need some extra money in one of your envelopes.
That's what the emergency envelope is for. This envelope can be used for adding money to any envelope you want.
If grocery prices rise, take some extra money from the emergency envelope to cover it. If you had a bad week but your fun money envelope is empty, take a bit from the emergency envelope.
Now keep in mind, the emergency envelope isn't a replacement for your emergency fund. It's more for the smaller emergencies. You should still have a separate emergency funded for bigger things like car repairs, job loss, etc.
Important note: You should always try to avoid using the emergency envelope. Only use it when you REALLY need to!
Online Purchases Envelope Guidelines
If you find most of your overspending is happening from shopping online, you should definitely have this as one of your cash envelope categories.
However, you obviously can't use cash over the internet, so how is this going to work? Well, here are the guidelines I came up with for this category:
- You allocate a certain amount of money to your “online purchases” envelope.
- When you want to make an online purchase, you must have enough money in your envelope.
- If you have enough money and you make the purchase, we'll assume it's on a credit card since you're shopping online.
- After purchase, you must go to the bank ASAP (next day is best), deposit the cash needed to pay off the purchase, and transfer it to your credit card balance immediately.
This is a good method for two reasons:
- You'll make less online purchases because it's a big hassle to have to go to the bank and deposit cash every time
- You won't be left with credit card debt at the end of the month because you'll be paying it off right away
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Moving Money From One Envelope to Another
Honestly, I see no problem in moving money from a less important envelope to a more important envelope. For example, moving money from your fun money envelope to your grocery envelope is only going to punish yourself.
However, you should never take money from your grocery envelope to put it into your fun money envelope. If you're out of fun money and emergency money and someone asks you to go out for drinks, tough luck. That's what the cash envelope system is all about.
The only time you can replenish your envelopes is whenever you have scheduled for it. You can't just go to the ATM and add money to an envelope all willy-nilly.
Most people replenish their envelopes every time they get a paycheck, or at the start of the month. You can do whatever works best for you.
Also, if it's the end of the month and you've got some extra cash left over in some of your envelopes, congrats! You stayed under budget. Here are some things you could do with your extra cash:
- Reward yourself
- Stick it in savings
- Invest it
- Add it to next months envelopes
Benefits of the Cash Envelope System
1. Stop Overspending
The main benefit of using the cash envelope system is that it's an extremely simple way to stop yourself from overspending.
If you're buying clothes and you have $100 in your envelope, but your total comes to $125, you have no choice but to put something back. It sucks, but it makes you stick to your goals.
2. Spend Less Each Month
The next benefit is that you spend less when you use cash (there have been multiple studies done on this). When you've only got $300 in your envelope for a months worth of groceries, you'll think twice about impulse purchases.
Downfalls of the Cash Envelope System
1. No Credit Card Rewards
The main downfall about using the cash envelope system is that you'll be missing out on credit card rewards. This is true, but if using the cash envelope system stops your overspending and helps you save even 10% more per month, do you even need the 1-2% cash back credit card rewards?
Plus, you can still use credit cards for bigger purchases, you'll only be using cash for those categories that you overspend on. Just make sure you use your cards wisely!
2. It's Inconvenient
The only other downfall of this cash envelope system is that it can be a bit inconvenient. If you're going to buy groceries and halfway to the store you realize you forgot your envelope, you have to turn all the way around.
A solution to this problem would be to keep some backup cash in your wallet, but some would say this is cheating. I'll leave it up to you.
Should You Use the Cash Envelope System?
That's a good question. This system isn't going to work for everybody, and if you do decide to use it it will definitely take some getting used to.
That being said, if you find yourself frequently overspending on certain things, the cash envelope system can be a huge help. Plus, it's not like you have to use cash for everything, just the things that frequently overspend on.
The bottom line:
I think the pros of the cash envelope system definitely outweigh the cons, and I think it's a great way to get control of spending. If you find yourself spending more than you'd like to each month, it won't hurt to try it out.
How to Implement the Cash Envelope System
Implementing this system into your life should be pretty easy. Here are the steps you should take:
- Figure out your cash envelope categories
- Figure out the max amount you would like to spend in those categories each month
- Decide when you will replenish your envelopes
- Go to the bank and fill your envelopes
After you do those four steps, it comes down to reviewing and adjusting. You may need to add money or take money away from certain envelopes. Just make sure you're being honest with yourself about how much money should be in each envelope.
How to Use the Cash Envelope System Electronically
Ok so this basically goes against this whole method, but I know some of you simply won't even give the cash envelope system a try because you don't want to use cash.
The alternative is to use GoodBudget. This personal finance app allows you to use the envelope system digitally! That means you could use a debit card, credit card, or a reloadable card like Koho, while still following the same system.
You can also sync your budget up with your family members so everyone can stay on the same page! How handy.
The only downfall of doing a cash envelope budget electronically is that it's easier to cheat. But, if you have the self-control to not cheat, it should be ok.
If you want to really get in control of your money, the cash envelope system works great alongside a zero-based budget. Learn how to create your own zero-based budget here.
Other than that, that's about all you need to know about the cash envelope budgeting system. I definitely encourage you to try it out if you find yourself overspending regularly.
Now I'd like to hear from you:
What's your favorite thing about the cash envelope system? What's your least favorite thing about it?