If you’ve been reading up on ways of budgeting, you have probably come across the term ‘cash envelopes’ as one of many methods to keep your spending under control. But what are cash envelopes and how could they help you? Cash envelopes for budgeting can also be known as the Envelope System or Envelope Method, and has been popularised by Dave Ramsey who is a well-known American money expert, author and radio host. The cash envelope system is designed to help conquer overspending, and encourage discipline when managing your money.
So, what exactly are cash envelopes?
Cash envelopes are used as a method of budgeting where you withdraw cash directly from your bank account each month after you receive your pay cheque (or weekly if you are paid weekly) and after you have paid any direct debits. You then split the cash into categorised envelopes according to your budget. Usually, you will write the category on the front of the paper envelope, for example, ‘groceries’ and then write down the total amount that is inside the envelope.
You should only allow yourself to spend exactly what is in the envelope each month, and always put any change leftover from a transaction back into the correct envelope. The cash in each categorised envelope should not be used for anything else. If you are lucky enough to have some cash left over at the end of the month, you can put this into a savings account, treat yourself, roll it over to the next month or put it aside for expenditure at Christmas. Where any extra money ends up is completely up to you.
How do you use cash envelopes?
You can get started with using cash envelopes for budgeting as soon as your next pay cheque comes in. But before starting to use cash envelopes, you need to determine your budget if you haven’t done so already.
This means that after all of your direct debits and bills are settled, you need to split the remaining money into categories such as groceries, fuel, entertainment, clothing etc. Make sure that the categories are tailored to you, and then go ahead and make as many envelope categories as you need. You can always go back and tweak the categories the following month if you need to make any changes.
Most people use cash envelopes for day to day household budgeting, but you can also use them when you are on holiday to help keep your spending under control. On holiday you might use categories such as restaurants, excursions, taxis and gifts to ensure that you come in on budget rather than running out of cash unexpectedly.
You can also use an envelope system to store some ‘emergency’ cash- this could be an envelope that you keep safely in your home that holds a sum of money for unexpected expenses. This could be things like a train ticket to see an unwell relative, a replacement appliance, or even a wedding gift. If you don’t trust yourself not to spend any spare money in a bank account, this might be a good way of making sure you always have a cash safety net.
Cash envelopes are also a good way to accumulate money for events such as Christmas, where you can put one envelope aside and build up a little wad of cash slowly in the months leading up to the big day. If you think this could work for you, the sooner you put this into practice the better. You won’t notice small amounts coming out of your account every month, but you will most definitely notice a lump sum coming out in December!
How can cash envelopes help you?
Cash envelopes are very visual, which means that instead of putting your head in the sand and hoping there is enough money in your account, the cash is right there in front of you. Some people find that parting with hard earned cash makes a transaction feel a lot more ‘real’ than using a debit card or contactless payment. Since money has already been allocated to each envelope, this also prevents you from spending money unnecessarily from a bank account or wallet.
Cash envelopes force you to stick to a budget, and to be strict with yourself. It means that if you forget your envelopes when you go to the shop- you have to go back home to get your cash. It means that if you’re at the end of the month and you have no fuel cash left in the envelope- you need to take the bus. The cash envelope method means that you need to keep an eye on your money at all times, to ensure you have enough in each envelope to last you for those last few days of the month. It can be tough to start with, but once you start to see the benefits, you may even start to enjoy budgeting!