How To Use The Envelope System of Budgeting (Examples) - Savvy Earning (2024)

BUDGETING, PERSONAL FINANCE

• Last updated:July 25, 2023

The cash envelope system is a peachy little budgeting trick that can help you take control of your finances in a more visual and hands-on way.

By using the system, you become more mindful of your spending and less likely to overspend in any particular category.

However, like any other budgeting tool, the cash envelope system may not be the best fit for everyone. But, it can be a great option if you want to see where your money is going.

The envelope system puts you in the driver’s seat of your finances. It empowers you to allocate your hard-earned money to different categories, making sure you don’t blow it all on impulse buys. You decide where your money goes, not the other way around!

Plus, it’s surprisingly stress-relieving! Instead of worrying about complicated spreadsheets or budgeting apps, you’ve got your trusty envelopes with real money inside.

The envelope system of budgeting is super simple method where you use cash and labeled envelopes for different spending categories.

Each envelope represents a specific expense, and once the cash is gone, you stop spending in that category. It helps you control spending, avoid debt, and stay on track with your budget.

The magic of this system is that you can’t overspend! Once the cash in an envelope is gone, that’s it

It can be ideal for you if you want to know where your money is going. If you want to visualize where your hard-earned cash is going, then the cash envelope system might be for you.

If you’re unsure whether the system is right for you, here are some questions you can ask yourself.

• Am I comfortable using cash for most of my purchases?
• Do I want a visual system to track my spending?
• Do I tend to overspend?
• Can I commit to regularly setting aside cash for envelopes?

Here’s the deal, it’s important to know that every budget is different. You have the ability to choose the amount of cash you want for each category.

Some folks might put a large portion of their cash into a ‘groceries envelope’ while you may put most of your cash into a ‘rent’ envelope.

The first couple of months can be difficult but once you adjusted to the system, it will be more effective than your previous budgeting methods.

Now let’s get started with thisbudgeting strategy.

First things first, you need to create a proper budget amount for each category in order for the cash envelope system to work. If you placed too little or too much cash into your envelopes, your financial life might go crazy.

Note: Adjust your budget along the way as you’ll need to adapt when new expenses arise.

Start by looking at your take-home pay to make sure that you are creating a budget that you can actually afford.

Now, make a list of all your fixed expenses. These could include

• Rent/mortgage
• Utility bills
• Insurance premiums
• Loan payments

Subtract that and you’ll know exactly how much you have leftover for variable expenses.

Aftercreating your budget, it’s time to split your spending into different categories for your cash envelopes.

Here are a few common cash envelope categories you want to include:

• Groceries
• Transportation
• Entertainment
• Hobby
• Clothing
• Beauty
• Restaurants
• Travel
• Pet

Remember that this list is a starting point, and you can customize it to fit your lifestyle and financial priorities. Everyone’s budget will be unique.

Figure out how much you can spend in a specific period. You have to be honest about your past spending.

Do this by Setting limits based on what you can truly afford, not what you wish to spend. It might feel tough if you’ve overspent before, but living within your means is crucial for your financial well-being.

If you cannot stick to you spending limit, you may want tostart a side hustleto generate more income.

Now comes the fun part! Fill your cash envelopes with cash based on the budget you set for each category.

Tip: Avoid using ATMs to withdraw your money as it comes with a cash withdrawal fee.

You can fill your envelopes with your next paycheck instead!

If you have leftover cash at the end of the month, you can put it into your savings or just roll it into the next month.

Keep an eye on how much money is left in each envelope as you make purchases throughout the month. This helps you stay aware of your spending habits and prevents you from inadvertently overspending.

If you notice that you’re consistently running out of cash in a particular envelope before the month ends, it’s a signal that you may need to adjust your budget for that category.

Let’s say your income after taxes is $3000 per month and here’s how you allocate your money:

Now that you know your spending categories, make cash envelopes for your variable expenses and fill them with cash according to your spending limits.

As the month progresses, keep track of your spending. If you noticed that you’re running out of cash on a particular envelope, reevaluate your choice and make adjustments for the next month.

Do this for the next few months and you will have better control of your finances.

Having money left in your cash envelope at the end of the month is a fantastic achievement. It means you managed your spending really well and stayed within your budget.

So, what should you do with that extra cash? Well, you’ve got a few options:

It happens to the best of us and it’s totally okay!The cash envelope system is a learning process, and you can use this as an opportunity to fine-tune your budgeting skills.

It can be tempting when your inner voice tells you to use another envelope for your expenses but

Here’s what you can do:

• Rework your budget
• Postpone non-essential items
• Start a side hustle