Ever wondered how our parents used to manage money for uncertainties in life?
They used to hide their money under the beds, plants, almirah, kitchen, and whatnot. And whenever they find themselves short of some money, they utilize those secret bucks to get out of trouble.
Now the question is, can today’s generation manage their money in the same way?
The answer might be a big NO for most of you. Here’s why:
First, it’s a pretty old-fashioned method and doesn’t suit perfectly in today’s world. Second, there are high chances that you’ll forget where you’ve hidden your money. And Third, if someone else finds your money and takes it without telling you, then you’ll be left with nothing.
To counter all these challenges and help you save some money, there’s a new method known as Cash Envelope System.
In this article, you’ll learn everything about this great money-saving method that will help you comfortably manage your finances.
Cash Envelope System
Now you must have understood what we’re talking about, so let’s explore this further.
The Cash Envelope System refers to a budgeting strategy.
It involves saving money in different envelopes for various living expenses. You force yourself to deposit some cash in those envelopes, depending on their budget.
This system may look like a piggy bank where we deposit money to grow it big someday. However, unlike the piggy banks, it requires discipline, honesty, and commitment. And the rewards you get in the end are worth it.
The Cash Envelope System wallet involves 5 amazing steps:
Step 1: Define Your Budget
If you find it hard to save any penny at the end of the month, then the most common reason is that your budgets are not defined.
To start this journey of saving money via the Envelope System, you need to create a budget first. Without knowing how much you need every month to pay down your expenses, it’s going to be quite difficult for you.
Building a budget is a time-consuming process, but it’s one of the essential parts of your financial life. Over time, you might have to tweak your budgets depending upon your rising expenses.
Start tracking how many expenses you have in a month, and make sure to stick to them for at least a few months. This way, you’ll have an idea about how much you need to save to pay your expenses.
One important thing here is that you should also know how much money you can afford to expense out monthly. So check out your monthly income after taxes to ensure how much you can afford to spend.
Step 2: Create Categories Of Your Expenses
Now that you have an idea about your spending and budgets, it’s time to create your spending categories.
You don’t need to define categories for all of your expenses. Just focus on only those expenses which are essential and important.
Below are the most common categories that you may want to consider:
- Home Rent/Mortgage
- Dining Out/Restaurants
- Emergency Fund
- Miscellaneous Expenses
Now that you’ve created specific budget categories for yourself, it’s time to make an envelope for each category.
These envelopes will help you save some money for each of your categories, and most importantly, prevent you from overspending.
Step 3: Define Limits For Each Category
The next step is to set the limit cap for each of your categories. Again, you don’t want to overspend from one category and unbalance that category.
Here, our goal is to ensure that your finances stay in equilibrium and a managed state at the end of your every pay cycle. To set up the limits for your expenses, recall what you’re spending on average in the previous months.
For example, let’s say you’re setting up the limit for the “restaurant” category. First, find out how much money you spent on dining in the last month or two months back. I know it’s hard to recall each penny but set an average amount for restaurant expenses every month.
Once you can determine an average amount for each category, write down that exact amount on the top of each envelope.
You need to be super honest about this part to make this Cash Envelope System work. Don’t set such limits which you can’t afford. If you’re low on income, limit yourself to only 4-5 categories and try to achieve your target.
Also, your categories should not be restricted on a monthly basis. For example, if you’re creating a category for “vacation,” which you want to achieve in the next 6 months. Then, you’ll have the flexibility of 6 months to top up this envelope.
Step 4: Top Up Your Envelopes With Cash
After completing all the previous steps, it’s time to try this Cash Envelope System.
You can choose to fill up your envelopes on a priority basis. Here’s how you can set your categories on priority:
- Priority #1: Rent, EMI, Mortgages, Groceries
- Priority #2: Clothes, Restaurants, Hobbies
- Priority #3: Vacations, Luxuries
Now that you’ve set up priorities for each category, fill up your envelopes starting from Priority #1.
Once you top up your cash envelopes, payout all your expenses. If you’ve some amount left in any of the envelopes, you can either move that amount to any other envelope or roll the amount in the same envelope for next month’s expenses.
Step 5: Adjusting Expenses
Once you create a habit of paying down your expenses via the Cash Envelope System, you’ll reach a point where you’ll have to adjust your expenses.
Some of your categories might do well for months, whereas others will find it hard to reach their set targets.
In this case, you must adjust your categories based on your spending experience. For example, if one category is always getting overspent, then it’s time to raise the budget of that envelope.
Also, there are higher chances that you might not nail down all your categories in the initial months. However, with time you’ll reach your targets with some good discipline and determination.
Pros Of Using Cash Envelope System
The benefits of using this system are:
- It helps in developing money-saving habits for you
- It forces you to learn about money and budget discipline
- It helps you pre-plan the budgets in a smarter way
- It controls your impulsive spending habit
- It prevents you from taking loans and debts for your necessary expenses
Cons Of Using Cash Envelope System
The drawbacks of using this system are:
- It works in a 100% cash manner. So, if someone finds it hard to manage fiat cash, this might not work for them
- You will have limited credit card usage using this system. So there won’t be many reward points or other credit card benefits
- If you get your pay in your bank account, then you’ve to withdraw that in cash first to fill your envelopes
After reading the above article, it’s time to give Cash Envelope System a try with all the learnings you have now. It’s certainly a great way to manage your budgeting, spending, and expenses.
One needs to understand that this system might not be a perfect fit for everyone; hence, you should give it a test try once if you want to.
There are other ways as well to track down your budgets and expenses, such as budgeting apps, creating bank categories, etc.
With time you’ll find out what works best for you, and you’ll be able to achieve your financial dreams.