Are you wondering how to start using the cash envelope system of budgeting? If so, then this article is for you.
Below I explain in detail everything you need to know to start using the cash envelope budgeting system (also called cash stuffing).
You’ll learn about how to track your spending. You’ll also learn some of the advantages and disadvantages of using the cash envelope method.
I also included a free weekly expense tracker that will help you accurately track your spending so that you don’t go over budget in any category.
Let’s get started!
What is the cash envelope system?
The cash envelope system (cash stuffing) is a type of budgeting system for those who are looking to get more in control of their spending. It’s the preferred method for people who live paycheck to paycheck and are looking to get out of debt.
How to use the cash envelope method
Andrea Woroch, a consumer finance expert said “with this budgeting method, you assign a physical envelope for each budget line item including things like rent or mortgage, groceries, healthcare, entertainment, travel, etc., and put actual cash for the amount you’ve designated for each line item in the coordinating envelope.
You then use that cash for each of its specified purposes.
You can’t spend any more than what you have in the envelopes. In the event you need more for activities one month, you may have to borrow from another envelope which means spending less on another category. This will ultimately keep you from overspending and living beyond your means”.
One thing you want to keep in mind when making your envelop categories is the area where you tend to overspend each month.
Rachel Cruze, a personal finance expert with Ramsey Solutions says “most people overspend on areas like groceries, restaurants, gas, medicine/pharmacy, haircare/makeup, car maintenance, personal, entertainment and gifts”.
If you tend to overspend on a particular category, then you need to track your spending carefully to see where the money goes.
For example, if my eating-out budget is $100 dollars each month, and I tend to go over budget and spend $200 dollars instead, then I know this is an area I have problems with that needs to be addressed.
I’ll address the problem by tracking what restaurants I frequent, what I tend to order, and how much it costs. Doing so will help me adjust my spending in that category better.
How to track your spending with the cash envelope system
To track your spending when doing cash stuffing, all you’ll need is a simple notebook. You can also get a printable expense tracker like the one provided below.
Create 3 columns labeled “location/store name”, “Items bought”, and “amount spent”.
Every time you spend money from the category where you tend to overspend, write and track it using the expense tracker.
In my example above, I overspend on eating out. So I’ll track the name of the restaurant, the type of food I order, and the price I paid.
At the end of the month, you’ll be able to see your overspending pattern clearly.
You can then decide to stop going to that restaurant or choose a cheaper item on the menu that’ll allow you to stay on budget.
You can do this for any category on your list.
What are the benefits of the cash envelope method?
Cash envelope holds you accountable for spending
One advantage of using the cash envelope system is that it helps hold you accountable for your spending.
It’s easy to forget that you’re using actual money when you swipe a credit card. Because you don’t physically see the cash leaving your hand, it may be easy to overspend on things you don’t need.
A study done by MIT found that using credit cards tends to make people spend more compared to cash. The study showed that using your credit card gives you the same dopamine as the one you’d get if you used an addictive drug.
It puts the cost of the item out of your mind regardless of the price.
With Cash stuffing, you don’t ignore small purchases
Ms. Woroch, a consumer finance expert said “Some people do better when they manage actual dollars rather than trying to manage money online across various accounts.
This is where you tend to lose track of their spending and overlook small purchases made on different credit cards that can ultimately bust your budget and put you into debt”.
The cash envelop system keeps you aware of every dollar you spend because you see the money physically gone from your envelope after a purchase.
This awareness helps teach you discipline and self-control.
What are the potential downsides of using a cash envelope budget
There are some disadvantages to using the cash envelope budgeting system that you should keep in mind. Although there are ways to overcome these challenges.
Cash stuffing takes a lot of time and effort
One disadvantage is that the cash envelope method takes a lot of effort to keep up with.
Since most people get paid through direct deposit into a bank account, to stuff your envelopes, you’ll have to withdraw cash directly from a bank every pay period. If you don’t live close to your bank, this can be tough to keep up with.
Using the Cash envelope system requires multiple trips to the bank
Another disadvantage of using the cash stuffing method is that you will have to deposit some money in the bank again if you need to make online purchases or pay bills online.
This requires multiple trips to the bank each month. Inconveniences make it hard to continue this form of budgeting.
You can miss out on online rewards/savings with the cash envelop method
One last disadvantage of using the cash-stuffing method is that you can miss out on rewards offered by credit cards or online cash-back portals.
Ms. Woroch, a personal finance expert said “This doesn’t mean you have to completely cut out credit cards. Once you grow accustomed to this new way of budgeting and spending, introduce credit cards back carefully and only use them for purchases that you have allocated in cash for those purchases. Then deposit the money into your bank and pay off your card immediately so balances don’t grow out of control”.
For example, If I budgeted $100 dollars towards my water bill for the month, I can pay that water bill online with my credit card.
After I’ve used my credit card, I need to take out $100 dollars cash from the utilities cash envelope category and put it in the bank.
I’ll then pay my credit card bill with that $100 dollar from that category to balance things out.
It’s hard to live in a digital world using only cash
Brooklyn Lowery, a credit card expert said “In our increasingly digital and online world, cash money can’t always do the things you need it to do. Online shopping, booking hotels, and rental cars are all things we need a card for. We also use cards for peer-to-peer payments through Venmo and apps like that. Things like these would be impossible to do using only cash.
It is dangerous to carry all your cash around in envelopes
Ms. Lowery, a credit card expert says “the cash envelope system quite literally puts all your eggs in one basket. If you have several categories of envelopes with you while out running errands and you happen to misplace your purse or wallet – or even have it stolen – that money is very well gone for good.
If your credit card is stolen, however, you are inconvenienced, but not out that money. Traveling with piles of cash is generally a bad idea, while credit cards can provide ease of use, security, and even added perks while you travel.
You can’t build your credit if you’re not using credit cards
Lastly, the envelope system won’t help you build credit. If you’re hoping to raise your credit score, which can lead to better mortgage or other loan rates as well as better insurance rates, you may be better off responsibly using a credit card. Keep in mind, too, that many credit cards offer rewards, money-saving perks, and other extras that you miss out on if you’re only using the envelope system.
What categories should my budget envelopes have?
Before we discuss some list of cash envelope categories, we need to first understand the differences between fixed and variable expenses
A complete list of over 90 cash envelope categories can be found in this article: 91 + Cash Envelope Category Ideas + Free Printable
Fixed Expenses
Fixed expenses are those expenses that usually remain the same from month to month. They may occasionally change, but in general, they remain the same.
Examples of fixed expenses are rent, mortgage, and utility bills like light, gas, and water. Car payments are also considered fixed expenses.
Variable Expenses
Variable expenses are those that change from month to month. It might be a little difficult to budget for variable expenses because you don’t know exactly how the amount will change each month.
Examples of variable expenses include medical care, food, and clothing.
It’s very important to make a list of all your fixed and variable expenses when preparing to budget with the cash envelope method.
Let’s take a look at some possible budget categories below
List of Budget Categories for Cash Envelopes
Personal Care
- Makeup & Skincare
- Nails
- Hair care
- Massage
- Grooming products
Other Variable expenses
- Medical bills
- Home repairs
- Car repairs
- Clothes
- Eating out
- Food shopping
- Vacations
Fixed Expenses
- Rent
- mortgage payments
- Car payments
- Other loan payments
- Insurance premiums
- Property taxes
- Phone
- utility bills
- Child care costs
- Tuition fees
- Gym memberships
- Medication
- Insurance copays
A complete list of over 90 cash envelope categories can be found in this article: 91 + Cash Envelope Category Ideas + Free Printable
What percent of my monthly paycheck should go into each cash envelope category?
The general rule for budgeting is to use the 50-30-20 method. In this method, 50% percent of your monthly paycheck should go towards fulfilling your NEEDS.
Your needs are all your fixed expenses, and variable expenses that you can’t live without. So things like your rent and phone bills should be paid first.
30% percent of your paycheck should go towards your WANTS. Your wants are the variable expenses that you can do without. But these wants are important because they help you live a more balanced life.
Some of the wants include a gym membership, massages, hair, and nails.
The last 20% percent of your income should be dedicated to your savings. If you have a savings account, 401K or 403B, stocks, bonds, etc, that 20% percent should be put into those accounts.
There are other budgeting methods you can choose from. This article talks about each one in detail
Frequently Asked Questions About Cash Envelope Method
What if you don’t have enough money for your bills?
When using the cash envelope method, you may occasionally run out of money in a particular category. If you run out of money to pay your bills, then consider borrowing from another category to make up for what you’re missing.
What to do at the end of the month with your cash envelopes?
At the end of the month, you should analyze your spending after using your cash envelopes. This is where a spending tracker could come in handy. Using a spending tracker will enable you to notice where you overspent that month. You’ll also be able to see the category where you had leftover cash.
Any leftover cash should be put into your savings account. You can also put excess cash into planning a vacation, or put it towards paying your bills for the next month.
What is the best thing about the envelope method?
The cash envelope system is easy to follow. It’s the recommended budgeting method for beginners.
What is a good time period for using the cash stuffing system?
You can use the cash stuffing system for as long as you wish. For some people, this is the only way they can control their spending each month.
How much money should be in each cash envelope?
The amount of money you put into each envelope depends on your expenses. If you live in an area with a high standard of living, then you’ll have higher expenses.
How do I use the cash envelope method for online purchases?
The cash envelope method can be used for online purchases and bill payments. You simply take the cash amount out of the envelope and deposit it in the bank. When you shop online or pay a bill, you’re only allowed to use the amount that you deposited in the bank from your cash envelope.
What should I do with the extra money in my envelopes?
If you have money left over in your cash envelope at the end of the month, there are several things you can do with it. You can add it to the budget for the following month to help pay your bills. You can also add it to your savings account.
Another option is to put it towards a vacation or another want you may have. It’s important that we plan for pleasurable activities because it will motivate us to keep budgeting.
Final Thoughts on How to Use The Cash Envelope Budgeting System
The Cash stuffing Method of budgeting can be challenging at first to follow if you’re not used to budgeting. Having to track every expense to make sure you’re not overspending is hard for most people.
If you’re new to this system, try not to be too hard on yourself if you do overspend in one category.
What’s important is that you learn from your mistakes from month to month.
Try celebrating every time you have money left over in one category at the end of the month. You can use that leftover cash at your discretion without having to track it. Just make sure that all your important fixed and variable expenses have been paid before you do.
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