How To Use The Cash Envelope System

Tags: Lifestyle, Money Management, savings, tips

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Budgeting is key to ensure that you do not overspend. With how digitalised and convenient shopping has become today, it is becoming harder to keep track of our spending. After all, it’s not real money if you don’t see it.

You could turn to equally modern solutions like budgeting apps to help manage your monthly budget, or you might want to try a more traditional method.

How it works

The cash envelope or envelope budgeting system is a classic method of budgeting that you might have seen your grandparents use. It works by having you withdrawing your entire monthly budget as cash and then literally sorting it into envelopes.

Yes, it is old, antiquated, and sometimes even tedious, but the lack of convenience may be just what you need to help you stick to your budget. The system basically forces you to accurately budget discretionary expenses every month. You use cold hard cash to physically control your spending. Once you run out, you stop spending.

Here’s how to get started:

1. Decide how to divide your budget

The first step is the most difficult, as you will need to figure out how to allocate your monthly spending. At this step, you will need to decide if you want to fully rely on the envelope method, or if you will still set aside some money for online payments.

Keep in mind that going all in with envelope budgeting means that you will be paying for your utility bills in cash – which is something people may not want to deal with. If you still want the convenience of digital bill payments, you should open a separate checking account solely for that purpose and treat it like a virtual envelope.

There is no one way for allocating your budget. However, we recommend sorting it all according to these basic categories:

Food
Household Expenses
Transportation
Utilities
Entertainment
Loans (if you have them)
Miscellaneous expenses (for anything that doesn’t fall into the other categories)

You can get more specific with your envelopes if you want. For example, you could even separate your food expenses into envelopes for eating out and for groceries. We recommend experimenting for the first few months to see what fits your lifestyle.

Don’t forget to set aside at least 20% of your income for savings

2. Fill your envelopes

Get an envelope for each category and write the category name on the front. Once you receive your paycheck, withdraw cash and put your budgeted amount into each envelope based on category.

3. Only spend what you have

By only using cash, once you run out of cash in an envelope, you have hit your budget for that month and should refrain from spending in that category until your next paycheck.

4. Use leftover cash to help clear debts faster

If there is extra money in your envelopes at the end of the month, use it to help pay off any loans or debt you may have. This will help you free up even more cash for other categories in the long run.

Now that we have cleared up how the cash envelope system works, we can now talk about its advantages and disadvantages.

Advantages

Instills discipline

Yes, it is tempting to simply spend more money once your envelope is empty. You might even have a cheat day or two when you first start using this method of budgeting. However, the more you use this system, the more it becomes a habit to not overspend, thus helping you to maintain discipline. The more you practice being disciplined, the easier it is to take responsibility for other life areas you want to improve.

Emergency cash on hand

With each passing day, we are moving towards a cashless society. The convenience offered by e-wallets and cards are simply too good. However, we are not at the point where we can go completely cashless yet. Having physical cash on hand is still a good idea, especially in times of emergencies.

Tangibility

When budgeting using physical cash, the concept of money becomes more tangible. Studies theorise that we might associate more value to physical cash than our plastic cards. When paying with cards or e-wallets, we do not actually see cash changing hands, making us more inclined to spend money. When using cash from an envelope, you will be more in tune with your budget because you will be reminded of how much you have left every time you open it.

Less wasteful spending

As already mentioned, what you have in the envelope is all you are going to get for the month. So long as you have the discipline to stick with the budget, you will likely not have to worry about unnecessary expenses. You will likely end up thinking twice about certain purchases as more and more cash starts disappearing from the envelope. You might even end up with some decent leftover cash at the end of the month!

Disadvantages

We live in the digital age

While cash is still used all over the world, we are without a doubt moving towards a cashless society. The ease of use and convenience of plastic cards and e-wallets is not so easy to overcome. While the cash envelope system does work, managing an entire household’s budget with it can be difficult if not everyone is onboard.

A workaround solution can be reached by listing your expenses per category and not spend a ringgit more that what you assign to each section. The main point of using physical cash is the visual reminder of money and how much of it you are taking out from each envelope but it can also be carried out digitally with the same principle.

The system can be confusing

The cash envelope system requires quite a bit of effort to pull off, and can be rather confusing for those who intend to pick it up. For example, you wish to head over to a shopping mall to get some groceries, buy some clothes, and maybe have some extra cash to spend on a fun afternoon. This means you are going to have to take out cash from several different envelopes.

In this case, it may help to have small envelopes you can take with you when you go out.

No rewards points

Credit card issuers have implemented a number of reward systems to encourage people to use credit cards. Some of these rewards are great to have, and can include things such as air travel miles or discounts on certain goods. Unfortunately, by not using credit cards, you are missing out on plenty of reward points and potential cashback rewards.

Use what works for you

Today, it might seem a little old-fashioned to be carrying so much paper cash in your wallet or at home. However, the cash envelope system can work if you have the discipline to stick to the rules and put the plastic away. This is not to say that everyone should do it. Each and every person has a different level of tolerance and patience. There are plenty of other ways to keep track of your budget if the cash envelope system sounds like too much time and effort.

If you are not sure on how to go about your budgeting, you can check out this article on the best budgeting apps to use to help get you on your feet.