How to Use Cash Envelopes to Control Spending

April 2nd, 2022

Let’s be honest, keeping track of where your money goes can feel like a never-ending battle. We swipe our cards, things disappear, and suddenly it’s the end of the month and you’re wondering where all your cash went. If you’re tired of feeling financially lost, there’s a surprisingly simple solution: the cash envelope system.

What is the Cash Envelope System?

The cash envelope system is a budgeting method where you allocate a specific amount of cash to different spending categories and physically withdraw that amount from your bank. Instead of relying on debit or credit cards, you use the money directly from your envelope for each expense. Sounds old-school, right? But it’s incredibly powerful!

Here's how to get started:

1. Identify Your Spending Categories: Start by breaking down your spending into categories. Common categories include:

Groceries
Gas/Transportation
Dining Out
Entertainment
Clothing
Personal Care
Kids’ Activities

You can adjust these to fit your lifestyle.

2. Determine Your Budget Amounts: Look at your past spending (bank statements, credit card bills) to get an idea of how much you typically spend in each category. Be realistic! It's better to start with slightly conservative amounts.

3. Create Your Envelopes: Get a set of envelopes (you can even use small pouches or folders). Label each one with your chosen spending category.

4. Withdraw Cash: At the beginning of the month (or week, depending on your preference), withdraw the designated amount of cash for each category and place it in the corresponding envelope.

5. Spend Only What’s in the Envelope: This is the key! When you need to pay for something, only use the cash from the relevant envelope. If you run out, you’ve hit your limit for that category for that period. You'll have to adjust your spending in the following month.

6. Replenish as Needed: If you’re still short on funds in a category, you’ll need to make some tough choices. Maybe you cut back on dining out or find a cheaper entertainment option.

Why Does the Cash Envelope System Work?

Increased Awareness: It forces you to think about every purchase. You're not just swiping a card and forgetting about it.
Tangible Limits: Holding physical cash makes you feel the value of your money more acutely.
Prevents Overspending: It’s much harder to overspend when you’re limited to the amount of cash you’ve physically withdrawn.
Simple and Flexible: It’s easy to understand and adapt to your specific needs.

Resources to Help You Get Started:

Give the cash envelope system a try – it might just be the key to taking control of your finances!