INTRODUCTION CASH ENVELOPE SYSTEM
The cash envelope system is also referred to as the envelope budgeting method. It is an excellent and organized way of saving money and paying your bills. It is mostly used to envisage and maintain an adjustable or flexible budget. This budgeting technique is simple, and it involves prioritizing income to meet the various categories of household expenditure in physically separate envelopes. Although this traditional cash envelope system is out of sync with today’s modern world, it still makes it easy for one to stick with a specific budget because once a particular envelope is empty for the month, you cannot spend anymore. This puts a constraint on each spending category. Dave Ramsey created this popular money-saving technique.
You can opt for those little white envelopes used for mailing things or invest in a cash envelope system wallet that is made of leather. Most budgeting wallets come with several envelopes within the wallet where you can label them with a marker.
There are a lot of financial setbacks that you might encounter over the years, and if all these things have happened to you, you could take a break and try out the cash envelope system. Some of the financial setbacks you might have encountered include and are not limited to;
Taking out a cash advance on a credit card.
Having no savings at all.
Bounced one or more checks or overdrawn on a checking account.
Ignored priorities and spent money on insignificant things.
Make use of a title loan, pawn loan, payday loan, tax refund anticipation loan, or rent-to-own loan. Carried a balance on one or more credit cards from one month to another and paid interest on the account.
THINGS YOU WILL NEED TO EXECUTE THIS BUDGET SYSTEM
Envelopes.
Markers.
Cash.
Budget.
WHAT TO DO TO IMPLEMENT THE CASH ENVELOPE
ESTABLISH YOUR BUDGET
Establish your budget by creating spending categories, dividing your money into categories, and establishing spending limits for each category. You can list your monthly expenses so that you can effectively group them into categories. For example, insurance, gas, and repairs could go into automobile costs, and movies and concerts could fit into entertainment costs. Other suggestions include and are not limited to;
Rent.
Pet.
Groceries.
Health.
Ensure that your monthly expenditure does not go beyond your monthly limit. Review your banking statements or receipts to have an idea of what your usual costs are.
DESIGNATE EACH CATEGORY IN AN ENVELOPE
Designate each category to an envelope and label the envelopes with the name of the category and the budgeted amount on the envelope. Ensure that you put the right label on the right envelope.
BREAK DOWN YOUR INCOME AND SEPARATE THEM INTO VARIOUS ENVELOPES
Your monthly budget should be in cash because that is the only way this method is going to work. For example, your paycheck is $650; cash your paycheck and fix the amount into the assigned category labeled on the envelope. If your budget for groceries is $80, then you put $80 into the envelope assigned for groceries. Your cash envelope system should look like this;
$80 in the grocery budget envelope.
$250 in the rent budget envelope.
$80 in the gas budget envelope.
$100 in the health budget envelope.
$80 in the grocery budget envelope.
$60 in the savings budget envelope.
SPEND MONEY FROM THE APPROPRIATE CATEGORY WRITTEN ON THE ENVELOPE.
If you need to pay for groceries, then pull money out of the grocery envelope. Money met for a particular need shouldn’t be taken out of another category. Whenever you are going out, always carry the right envelope with you. If you are going to repair your car, carry the envelope meant for that. Do not pull cash from another envelope if you spend all of the money in a separate envelope. Pulling cash from another category will cause you to fall short of cash in the other category.
Whenever you take money out of an envelope, recalculate what is left and write it on the envelope so that you will know how much is left at a glance.
If you have money left in an envelope at the end of the month, you can leave it in the envelope and add it to the following month’s expenses, or you take it out and put it in the savings or emergency envelope.
UNDERSTAND THE BUDGET CONSTRAINTS ON EACH OF THE CATEGORIES
It is important for you to know that this method requires discipline. If you are not disciplined enough to stay within your budget range, then you would have a hard time carrying this system out.
ADVANTAGES OF ADOPTING A CASH ENVELOPE SYSTEM
Simplicity
You do not need to gain access to online bank accounts. When there is money in the envelope, you have easy access to it.
Spend Less
If you only take a particular amount of cash into the store or to wherever you want to spend the amount, you will not get into debt.
SOME DRAWBACKS TO THIS TECHNIQUE
You should also understand that, while there are a lot of cons to this method, there are also some cons that you should watch out for.
Inconvenience
It can be quite difficult to use cash for our daily expenses in this modern age of online payment. This means that you cannot make any payment easily and in the comfort of your home. Adopting this method will prevent you from making online subscriptions or transfers for anything. This can be very problematic and time-consuming if you would have to be present physically to make such subscriptions or payments.
Complex Situations
This system does not work well for more complex financial situations. On the other hand, it may work perfectly well for a single person trying to learn how to budget for the first time. But if you own a company, it would be difficult to go down this budgeting route.
Security
This system of budgeting is very risky. If your car gets stolen and your envelopes are in it, then you lose your car and money at the same time. There is no pin or password to secure your finances. And you can lose a lot of money Just by losing your purse, car, or if your house gets broken into. If your debit card gets stolen, you have a pin, and your account can be frozen to protect you from further harm. Carrying cash around does not have the same protection as a credit card, and you should consider this if you want to adopt this budgeting technique.
THINGS TO NOTE;
Do not give up. It might take a while for you to get used to the system and get it running in your household.
Do not label your envelopes vaguely.
Give your envelopes in a safe place from water, fire, guests, etc.
If you receive receipts for any money you spend, do not dispose of it. Instead, put the receipts in the envelope. Keeping the receipts will help you keep track of how you spend your money, and it can be very useful during tax time.
ADOPTING AN ENVELOPE BUDGETING SYSTEM WITH FINANCIAL SOFTWARE
Adopting a cash envelope system wallet may seem obsolete because of the use of direct deposit of paychecks, debit and credit cards, checks, and electronic funds transfer. However, many budgeting and personal finance software are developed using the cash envelope system. It involves using a more convenient financial transaction technique while still adopting the discipline of envelope budgeting.
There are some applications available, like the ‘You Need a Budget’ application, which uses virtual envelopes to represent real envelopes with the budget categories. It also shows the balances and all the spending activities for each of the categories. Whenever you input your income into the application, it gets recorded, and a portion gets distributed to each envelope. When you want to make a purchase, you will have to tell the software what spending category you want to use, and the amount will be deducted from the category.
Whatever expenses you make would be removed from the appropriate envelope. Suppose a credit card is used as the payment method. In that case, the application can set aside the specific amount in the credit card payment category or envelope utilized when the credit card bill is paid.
CONCLUSION
Many people find it difficult to create and follow a budget. They think that dealing with budgets involves so much math and numbers. Others associate establishing a budget as constraints preventing them from getting started. Utilizing a cash envelope system wallet is simple and does not involve math and numbers. However, it requires a lot of self-discipline when it comes to your spending habits. For example, if you want to purchase some hair products and have no money left in your hair, skin, and nails budget, you would have to steal or take some money out of another envelope. And then, this will reduce the amount left for the other category.
