Have you started looking into different options when it comes to budgeting?
If you have then you’ve likely seen a whole lot about the cash envelope method, but maybe you’re not quite sure of how it works or if it will work for you.
The truth is that many people don’t really know how it works or what they can do with bills or other expenses.
What about if they use online payments for everything? What about when they have others in the household that are going to need money?
What about when the money is gone?
What Is The Envelope System?
Let’s start with the basics.
The envelope system is when you take all of the cash in your monthly budget and parcel it out into the different expenses that you have for that month.
You put a set amount of money into each envelope and then you can spend it how you want throughout the month.
After the money is gone from that envelope, however, you’re not allowed to spend in that category again.
So, let’s say that you have a budget of $500 for groceries this month.
You would put that amount into an envelope that’s marked for groceries.
Throughout the month you would take money out of this envelope any time that you had to buy groceries and when the money was gone you’d be done.
This type of spending means that you don’t get to spend more than what you have available for a specific category.
You learn how to budget your money better and make sure that you’re sticking to the amount that you have.
Now, this is generally the best way to go for variable expenses like gas, clothes, gifts and other things that you want, but not for your bills.
The best thing to do is pay the bills first, out of the money that comes in throughout the month, and then make sure that you’re splitting the rest of the money into the envelopes that you’re going to spend.
What If I Run Out of Money in My Cash Envelope?
The short answer is that once the money is gone you don’t get to spend in that category anymore.
So, if you spend all of the money in the entertainment envelope you don’t get to spend anything else in this area until the next month when you’re able to fund the envelope again.
You’re not allowed to take money from another envelope to cover expenses in something else.
So, if your clothing envelope still has money in it you can’t take that money and put it toward your entertainment budget.
You want to make sure that you’re sticking to the budget, after all.
If you have a partner who needs access to a specific envelope as well as yourself you might want to give them part of the money and keep part of it yourself.
In this case, if one of you spends all of your shares then you could split the remaining share of the money for that envelope.
What If The Money Is Spent?
If you’ve spent all of the money from all of your envelopes it means that you’ve done a pretty good job at deciding just how much money you actually need in each category and that’s a good thing.
That’s where you’re going to hit the sweet spot and be able to adequately plan for anything that’s happening in your life.
Envelope Budgeting System – Benefits
If you already tried some budgeting systems, it’s the right time to try this one.
Here are the main benefits of the envelope budgeting system:
See Your Money
You can actually see all of your money when it comes to this system, which means that you can really see where you’re saving money from an envelope at the end of the month.
If you managed to come in under budget on something you get to actually see that instead of numbers on a bank account.
Control Your Spending
When you’re spending cash you’re more likely to see where you’re spending it and you’re more likely to think about it.
After all, you have cash that you need to hand over.
If you don’t have cash you’re more likely to spend your money on things that you might not actually need and only realize it later.
It’s even been proven that people spend up to 15% less money when they use cash.
Prepared for Emergencies
If something comes up and you have an emergency you have cash on hand to take care of it.
This is going to be important because it lets you take care of an emergency a whole lot faster.
Plus, some emergencies may not be able to be handled with a credit card.
You’re going to have to stick to the budget with this method because there’s no other way to go.
If you run out of money you’re not going to have anywhere else to turn because all you have is the cash.
You can’t just go into a store and start impulse buying because the money you have available is limited.
You’re not going to be paying overdraft fees with this method because you’re using cash.
You can’t spend any more money than you have because of that.
There’s no danger of spending with a credit card or debit card and going over your limit or surpassing your current bank balance.
That’s going to keep you a whole lot better protected.
Envelope Budgeting System: The Cons
The cash envelope budgeting system is not right for everybody. Here are the main downsides you’ll face when trying to implement it:
Difficult to Start
For some people this can be a difficult process because they just don’t know how to get through it.
After all, how do you make sure that you’re sticking to the right envelopes for everything you buy? How do you categorize different things?
How do you make sure that you’re not taking money out of the wrong envelope or to divide out different expenses that you’ve paid?
This can get a little confusing for those who are just getting started with this method and it can get overwhelming.
Requires a Large Amount of Cash
If you’re not used to carrying cash then carrying this much cash at one time can be a little unnerving as well.
You’re going to need to carry all of the money that you spend in a month (aside from your bills) in cash.
That’s a lot of money to be walking around with all the time and not everyone really wants to do that.
If you prefer you can definitely take only a small amount of the cash with you at a time and then allocate it from the correct envelopes every day when you get back home.
For some people the idea of being restricted on how much money they can spend in any particular category is a little bit too strict.
After all, you want to be able to spend money wherever you want, right?
And with this type of system you’re going to have set amounts that you can spend in each category.
Sure, you get to set the categories and you get to set the amount of money in each of them but that’s still not exactly the level of freedom that you might want to have.
Instead, you’re still restrained.
Credit cards offer you rewards for spending specific amounts of money or even for every dollar that you spend but you’re not going to get that with the envelope system.
You’re going to get no rewards at all this way.
Sometimes it can be difficult to get the money that’s needed to the right person every time.
You might find yourself turning in receipts to a partner in order to get your money back, which can be a bit annoying.
Continuous ATM Trips
You’re going to need cash and that means you need to either run to the bank or to an ATM continuously in order to keep getting the cash out of your account.
This can be a bit of a hassle and it’s going to require you to do some planning in order to make sure you get there when you need to.
If you’ve decided the envelope budgeting system is not right for you, there are a couple of great alternatives to consider:
If you prefer the traditional route you can absolutely do it.
All you need to do is list out the money you have coming in each month, subtract the money you have going out each month and then allocate the rest to your different categories.
With this method, you allocate 50% of your income to the things that you need (like bills and required expenses), 30% to things that you want (like going out to eat or to the movies) and 20% to paying off your debts or saving (for retirement or education).
This budget is actually quite simple for most people and gives you a decent amount of freedom.
Here you’re going to give a goal or a task to every dollar that you have coming into your budget.
So, you might have a few dollars left at the end of the month but those are dedicated to go to the savings category.
There is no ‘extra’ money.
Instead, you make sure you give every single dollar a place to go and adjust your budget until this happens.
This budget means that you take 20% of the money you have coming in and put it into a savings account or toward debt.
Then, you take the rest of the money and you use it to pay for anything and everything else that you have to buy throughout the month.
That includes all of your expenses and bills as well.
Finally, you can set the amount of money that you want to put into savings and investment and then work on the rest of the things.
You’re not worried about where the money for those savings is going to come from because you’re forcing yourself to pay those first and then live on the rest of the money that’s available.