Is it sometimes hard for you to stop overspending your money? Try out the cash envelope system to track your money and make a proper budgeting plan.

Creating a budget and keeping track of your money is the first step towards your financial wellness. It doesn’t matter how much money you earn but without a proper budgeting plan you’ll end up with no money in your bank account.

But creating a budgeting plan might be difficult if you’re not a tech-savvy. Or you don’t like to use a mobile app to do so.

In this article, we’ll explain to you about the cash envelope system. Tracking your expenses might become easier for you using this method. It is easy to use and doesn’t require you to install or register for the mobile app to do so.

So, what do you need then?

  • Mailing envelopes
  • A pen
  • Your cash

One of the main advantages of using the cash envelope system to track money is that it is inexpensive to use. This method can help you to avoid unnecessary spending.

Studies show that most of the consumers spend more bucks while using debit/credit cards as compared to making payments in cash.

Source: Journal of Experimental Psychology

What is the Cash Envelope System?

The cash envelope system is a way to make a budget plan and keep track of your expenses every month. The method has been invented by Dave Ramsey. It may force you to accurately make a budget plan. However, it demands honesty, discipline, and proper commitment to do so. Ramsey’s tool is a good tool to help you stop overspending your bucks.

It is very simple to use this method. Suppose you get a net salary of $3000 per month. Then you budget $500 for groceries, $200 for dining out, $20 for Gifts etc. When the salary is credited to your account, then go to the bank and withdraw it. Put the cash in the envelope and mark it “Groceries”.

Every time you buy any groceries, it must be from the grocery envelope. Bear in mind that you need to be strict with yourself.

Moreover, for fixed expenses like rent, electricity bills, loans, etc, you can autopay from the bank account because you can not control these expenses.

How to Use Cash Envelope System to Reduce Unnecessarily Expenses

One of the main reason why we spend more money on unnecessary stuff is no one tell us to stop. In the heavily surrounded social media era, we usually surrounded by loads of materialistic things, which is useless in most of the case. Marketing companies better know how to market their products and create an urge within you to buy. After using it for a few days you might get to know the reality of the product.

By using this method you can avoid unnecessary spending. Here is how it works:

1. Budget Category of the envelope

Think of a budget category according to your lifestyle and buy an envelope of different colors. Some of the categories which you may choose are:

  1. Groceries
  2. Restaurants
  3. Entertainment
  4. Travel
  5. Gas
  6. Personal grooming
  7. Travel
  8. Gifts

2. Decide on your envelope Amount

This is the most important step as you need to figure out your monthly budget. Before you begin to allocate the amount, you’ll need to think of your fixed expenses ( rents, loans, insurance, etc) then allocate the amount to each category. It is recommended to create a plan which is most needed. Like groceries, travel and gas are sometimes not under your control. However, you can cut-off your money on restaurants, expensive gifts and entertainment.

3. Setup Cash Envelope

Its time to set up your cash envelope once you’ve decided the amount for each category. All you need is colored envelopes and a marker or pen.

Write a category on each envelope and put the allocated bucks into each one. Always try to keep envelopes in safe and one spot. In this way, you can remember to carry them with you when you leave your home.

4. Spending your Cash

Once you have your cash envelope ready, you can spend money and keep track of all of your expenses. In the beginning, you might face difficulty to switch from credit/ debit card payments. But, after some days of practice, you’ll get habitual and enjoy doing it.

Also, it’s also a great way to keep your receipts in each envelope so you get to know where you have spent your money.

Rules for Cash Envelope System

  • You can borrow from another envelope if you run out of money in one category.
  • If you spend your restaurant, you’ll not go to restaurants.

Suppose, at the end if you end up saving money into a few categories. Either you can carry it for next month or invest some money into mutual funds or stocks.