Using cash envelopes is a straightforward method for managing your finances by allocating physical cash into different spending categories.
So how do you get started?
When determining what spending categories to use, the key is to keep it simple. Usually, when people begin to use cash envelopes they try to use too many and overthink what their spending categories should be. Instead, consider what you pay for regularly in a week. Some common categories include:
- Groceries
- Dining out
- Entertainment
- Gas/transportation
- Personal spending
- Household supplies
Write down the spending categories you plan to fund.
📊 Budget Amounts
After you figure out what spending categories you want to use, decide how much money you want to allocate to each for the week or the month. Write those amounts next to the spending categories. If it is easier to budget by the week, then stuff your envelopes with enough money for the week.
- Groceries: $400
- Dining out: $100
- Entertainment: $50
- Gas: $150
💌 Find and Prepare Your Envelopes
You don’t need a fancy envelope to do cash envelope budgeting. You can use plain white envelopes which are inexpensive and available in your local drug store, Amazon, Target, or Walmart. However, if want to bring a little personality to your budgeting, then check out Amazon or Etsy for reusable envelopes. You can get started with paper envelopes you can print and assemble yourself, then invest in the reusable versions.
You can also find inexpensive wallets or small binders online to store your envelopes.
Label each cash envelope with the name of one of the spending categories you identified.
💵 Withdraw Cash
Withdraw the total amount of cash you’ve budgeted for all categories from your bank account at the beginning of the month. Use a cash flow worksheet to plan which denominations you need to get from the bank.
📈 Fill the Envelopes
Divide the cash into the respective envelopes according to your budgeted amounts.
💰 Spend from the Envelopes
When you need to make a purchase, take the cash from the appropriate envelope. Only use the cash from that envelope for its designated purpose. For instance, if you’re buying groceries, use cash from the “Groceries” envelope.
🔂 Track Your Spending
Keep track of your spending by noting down the amounts spent and what’s left in each envelope. This will help you see where your money is going and if you need to adjust your spending habits.
✋🏽 Stop
If you run out of cash in one envelope, stop spending in that category for the month. Some people may borrow from another envelope to make up a shortfall, but that can make overspending too easy.
⏪ Review and Adjust
At the end of the month or pay period, review your spending. Determine if you need to adjust the amounts for any category:
- Surplus: If you have leftover cash in an envelope, you can either roll it over to the next month, add it to savings, or reallocate it to another category.
- Deficit: If you run out of cash regularly in a specific envelope, then now is the time to reassess your budget to see if you need to allocate more money to that category next month.
💫 Tips for Success
- Be disciplined: Stick to the cash-only rule and avoid using credit or debit cards for categories you’ve budgeted with cash.
- Keep receipts: Store receipts in the envelopes to help track spending and review purchases.
- Adjust categories: If you find that you consistently overspend or underspend in certain categories, adjust the amounts for the next month.
By using the cash envelope system, you can gain better control over your spending, avoid debt, and work towards your financial goals more effectively.
