The Envelope System can be a great way to save money.
The money is allocated in envelopes to certain categories such as eating out, shopping and movies. The envelope is closed once you have spent the money. You cannot spend more.
It’s a great tool to use if your debt is high. Because it forces you to take responsibility for your spending but is that all it’s cracked up to?
Let’s find out how the Envelope System works and what it does well.
What’s the cash envelope method?
Cash envelopes are a simple way to control your spending. Each month you will have several envelopes that are dedicated to a specific type of expense. Each envelope is allocated a certain amount of money. This money will be used to pay the expense for the month. Some examples of expenses include:
Housing (rent, utilities, etc.)
Food (grocery shop purchases, takeout orders, dining out, etc.
Entertainment (streaming video subscriptions and books, etc.
There are many modern options for tracking your spending. Mvelopes allows you to track your spending online and follow the same principles as the traditional envelope system. This is useful because many expenses, such as Uber rides or student loan payments, cannot be paid in cash.
What are some of the benefits of cash stuffing?
The envelope method is sometimes referred to by other names, such as cash stuffing or cash-envelope stuffing. However, it’s the same thing. This strategy, whatever its name may be, has clear benefits that will make it easier for you to create and keep a budget that is bulletproof. This strategic approach will allow you to:
Establish and achieve savings goals. These can be achieved by making regular, deliberate contributions to your goal. You can avoid having your money spent elsewhere and not having any leftover by proactively allocating a certain amount to your goal each month.
Avoid impulse spending. After you have used up all the money in an envelope, it’s over for the month. Theoretically, you should wait until the next month to get more. This can help people who are prone to spending impulsively and then feel buyer’s remorse.
You should take a hands-on approach when managing your money. This makes money management and spending tangible. You’ll be more aware of how much money you spend if you use the old-fashioned method of using paper envelopes.
Learn to be more disciplined with your money. Cash stuffing requires you to plan and consider how your money is spent. It can help you have better control of your finances and remove the fear that comes with money if you feel out of control.
The strength of the cash system lies in its psychology. You don’t have to give up the things that you love, such as your morning latte. You can practice conscious spending by allocating funds for both necessities (like rent), and fun stuff (like entertainment).
How do I start using the cash envelopes system?
The cash envelope system’s ease of implementation is another benefit. To get started, you don’t need to be a master of Excel spreadsheets or purchase expensive software. Start cash stuffing your next monthly budget. Here are some tips to help you succeed.
Make a budget and a conscious spending plan
You will need to have a budget before you can start stuffing envelopes. Your budget should be balanced between the necessities and “extras” that will improve your quality of living. You can divide your overall budget into four categories:
Fixed Costs such as rent, utilities and food.
Investments such as stocks, bonds, and funds
Savings such as cash savings or retirement savings, like a 401K or Roth IRA
No guilt spending on the “wants”, which make everyday life wonderful, such as your Netflix subscription or luxury products you love
Once you have your budget in place, you can start to create a budgeting system. In this instance, we will use the envelope method. This is a guide for beginners if you are creating your first budget. Even if you don’t want to cash-stuff long term, a budget planner can help you manage your money.
Create spending areas
You can create spending categories in your budget by following the conscious expenditure model. Let’s suppose you have your “savings” account. This could be further divided into three categories: saving for an emergency fund and saving for special occasions such as birthdays or holidays and saving for a particular goal, like buying a car. Each of these secondary budget areas will receive its envelope later.
The 50/20/30 or 70/20/10 budgeting rules are two popular ways to divide up expenses. The 50/20/30 principle allows you to allocate 50% of your after-tax income towards necessities, 20% toward savings and debts, and 30% to the rest. The 70% rule is to allocate 70% towards expenses, 20% toward saving, and 10% toward charity.
Establish appropriate spending limits for each category
Once you have your conscious spending plan in place and your spending categories identified, it is time to answer the big question: What amount will you allocate to each category? This may be dictated in some cases by external factors. For example, rent or car payments can’t be reduced.
These guidelines aren’t rigid, but they can be adjusted to suit your needs. It is important to include all four categories (fixed costs, investments, and guilt-free purchases), and then set a reasonable limit in each category (as also the secondary envelopes within that category). Every person has a unique budget.
Fill up your cash envelopes
Cash stuffing is the fun part! Cash stuffing is possible if you are old-fashioned. You will need cash, envelopes, and something to label them. One drawback to this method is that you will need to take cash to your ATM to withdraw the money for your envelopes. This method is successful because you can take money out of the pouches. This psychological trick makes you appreciate every dollar that you spend.
You can also use Mvelope, a tech tool that allows you to digitally transfer money to various virtual cash envelope wallets. This is especially useful for online expenses. To track spending, some budget apps can be linked to your bank’s debit or credit card. These extras may reduce the psychological power of the original envelope method.
Roll over cash into the next month, or adjust spending
Create an envelope budget to leave you at zero at the end of each month. This means that every dollar you allocate to your four buckets should go towards spending. You may find that you have more cash as you go along. You might have canceled an Amazon Prime subscription that you don’t use, signed up for a coupon program to save on groceries, or paid off your vehicle.
This is the time to adjust your budget, and how much money you are spending. Either adjust your spending, such as by giving yourself more money in the guilt-free categories, or you can roll your cash over to the next month. This can create a buffer for the future.