As you start planning your finances; you will realise that you spend way more money on certain things like food, fun or entertainment. And that you need to have a budgeting system to get things in place. In comes the cash envelop method of budgeting.
The cash envelop method of budgeting is a simple yet effective budgeting technique that can help you keep your spending under control.
It consist of setting up multiple envelopes and dividing your money between each one. You use the designated money in each envelope for a different thing (like bills, groceries or entertainment).
A cash envelope system is an effective way to budget for someone who needs to stay on track. Not only will this method keep your spending in check, but it has also been shown that cash envelope budgeting method may lead to spending less money!
We will get into exactly what the cash envelope system is and how you can use it to stay on top of your budgets.
So, what is the cash envelop method of budgeting?
The cash envelope system is exactly what the name suggests. You label different envelopes and put your cash into the envelopes based on the budget categories. You’ll decide exactly what amounts go into each cash envelope based on your spending goals.
For example, you might put Rs. 10,000/- in the grocery budget and Rs. 3,000/- in the fun budget. The key here is that you’ll only spend the cash out of these envelopes for the specific budget category until the next cycle of your budget.
The cash envelope categories are only meant to cover your variable spending. This includes expenses such as beauty, household supplies, groceries, gifts, birthdays and fun. However, your fixed expenses such as your mortgage, car payment, credit card dues are not meant to be included in your cash envelope budget. You must continue to pay these fixed expenses as you normally would.
How to practise the cash envelop method of budgeting?
When you first start implementing the cash envelop method, it is important to remember that every budget every month is different. You have the freedom and flexibility to choose your cash amounts for each category. And don’t try to restrict yourself too much at one time because you might just break your resolve.
It may feel like a complicated process for the first couple of months. But once you get the hang of it, you might find it more effective.
The key here is to stick to the plan and tweak it accordingly for the first couple of months.
We will outline exactly how you can get started with this budgeting strategy.
Here how it goes
1. Track you expenses
The first thing you need to do is track your spending. If you are clueless as to where your money goes each month, then you’ll need to start here.
You can track expenses by scrutinising your bank statements, credit card statements or saving your receipts for later. Start by tracking your expenses for at least a month.
To get a more complete picture of your variable expenses, you may track your expenses for at least three months.
2. Set a budget
In addition to tracking your expenses, you need to do is create your budget. You need to analyse what you can really afford to spend each month. Take a closer look at your income to ensure that you are creating a realistic budget that you can actually afford. After determining your income, decide how much of your income is required to cover your fixed expenses such as your mortgage or home loan.
Once you’ve subtracted your fixed expenses from income, you’ll know exactly how much money you have leftover for variable expenses.
You can make envelopes to comprise each of your variable expenses.
3. Determine the categories of your spending
Once you have tracked your spending for at least a month, you can separate this spending into cash envelope categories. Find out how much you have spent in each category.
A few variable cash envelope categories you may want to include are:
Anything else that needs to come out of your variable expenses.
4. Limit each category
Next you’ll need to set spending limits for each of your cash envelope categories.
Start with what you can spend in a given cycle comfortably. Base your spending limits on what you can actually afford, not what you would like to spend.
5. Fill your envelopes with cash
After you’ve limit your spendings for each cycle, filling your cash envelopes is the easy part.
Once the money is in designated cash envelopes, you’ll need to diligently spend out of the appropriate cash envelope categories. If you have leftover money at the end of a cycle, then you can roll it into the next cycle or save.
6. Tweak as needed
As you continue to use the envelope money system, it is important to understand that you may need to adjust as per your requirement. In fact, adjusting your budget along the way should be an expected part of the process.
Although it is all variable spending, you will need to keep your spending caps for each category relatively close to what you need each cycle.
How to deal if I run out of money in my cash envelope?
In this case, be careful not to borrow from the other cash envelopes. When it comes to the envelope system, it can be really tempting to shuffle cash from one category to fund another.
So, if you run out of restaurant money, cook at home instead of going out.
Or if you see your gas money slipping away faster than you planned, limit your trips or start carpooling to work.
You need to find creative ways to make your money stretch when the envelopes are getting low!
The cash envelop method of budgeting is a powerful weapon in the fight against overspending. It can help you manage your money better than you ever have.
Throughout the process, you might uncover hidden spending habits that were destroying your budget. You may also find that you are more thrifty than you thought!
So when do you plan on using the cash envelop method of budgeting?