The Cash Envelope System Explained | CapWay
- Your income is restricting your spending, not your budget.
- Assigning every dollar to a job helps you spend with intention.
- The cash envelope system is inflexible to help you stay on track with your spending.
If you’ve tried to get control of your finances, then you have heard of the Cash Envelope System. Even if you haven’t heard of using envelopes (do people still own those?), you probably know the concept.
The cash envelope system is a type of budget where you cash your paycheck and divide the money into labeled envelopes to pre-determine how much you will allow yourself to spend on each category. While that definition may not sound simple, it is very simple to do.
But first, since this is a budgeting method, it is important to know what a budget is.
What is a Budget?
The word “budget” has become a dirty word. People go out of their way to avoid using it. It has the same negative connotation of restriction and disappointment as a diet. But, unlike most diets, when done correctly, budgets work.
A budget is not made to restrict you but to help you spend your money with intention. Let’s be clear, your income is what is restricting you, not your budget. Instead, your budget helps you control where your money goes so you don’t spend it on things that you don’t value.
That being said, the cash envelope system is probably the most inflexible budgeting system, which has its pros and cons, but we’ll get to that.
Recommended Reading: How to Create a Budget in 3 Simple Steps
How Does the Cash Envelope System Work?
The first step of the cash envelope system is to determine your spending categories. In general, that includes housing, transportation, food, and other things you spend money on (expenses). For example, your other expenses can include entertainment, restaurants (which shouldn’t be counted in the grocery category of your budget), medical, and travel. You have the power to choose where your money is going.
Add Cash to Envelopes
Second, you put a certain amount of money into each envelope to spend on that category. The whole idea is that if you only put $500 in the food envelope, you won’t spend more than $500 on food for the month. So, if you take one envelope with you to shop for groceries and you spend the $500, you won’t be able to spend any more money, which helps keep your spending on track. You could take money from other envelopes, but that is highly discouraged.
Reevaluating Your Spending
Third, refine your spending. The cash envelope system is as simple as two steps.
- Assign every dollar to a category.
- Don’t spend more than that on that category.
As stated above, you don’t want to start moving money from envelope to envelope. That ruins the entire system. At the end of each month, it is important to recalibrate and refine your spending.
Do you find that you need to spend more on food and less on clothes? Move some of that money around. Is transportation cheaper than you expected? Move some of that money to another category. You will never get your budget right the first time, and that is why this step is so important.
What are the Benefits of the Cash Envelope System?
The cash envelope system is simple and provides tons of benefits to those that decide to use it. Those benefits include:
- You stop overspending when you have cash. When you are out of cash, you stop spending because you have to
- You avoid impulse buys because you are more conscious of your funds. Also, if you don’t have the envelope (with the money inside) for that specific category with you, while you shop, you can’t spend it, which helps reduce the impulse.
- If you can’t overspend, then you can’t get into debt or make your debt problem worse. This is the biggest reason people use the cash envelope system.
- It holds you accountable for what you said your budget would be. There is an immediate feedback loop on your spending. Do you have money or not?
What are the Drawbacks of the Cash Envelope System?
For all its benefits, the cash envelope system is not perfect. There are some drawbacks, or side effects, that need to be considered before using this system.
- When you mess up (and I use the word “when” on purpose), it is very discouraging to open the envelope and find no money left, especially in the food category.
- You are less flexible in your spending. If you want to reallocate funds, you have to be with your envelopes physically moving things around. You can’t change your budget on the fly (which can also be a benefit).
- Using cash in the modern world is hard. You have to deal with change, worrying about losing your money or having it stolen, and you don’t get rewards from using credit cards. Of course, if you are in credit card debt already, this is not a drawback, but it is something to consider.
- It is harder to make online purchases when your money is in cash. The best way to get around this is to have an “online category” and to put that money into a debit card account, but “online” is such a big category it could defeat the purpose of the whole system.
Recommended Reading: Four Types of Budgets to Level Up Your Finances
How Can You Meet Your Money Goals?
If you are convinced that the cash envelope system is right for you, then you can start using it to meet your money goals. You can have a money goals category of cash you don’t spend. Any leftover money in each category can also be put towards a money goal.
CapWay Can Help You Meet Your Money Goals
When you put your funds into your CapWay account, you can organize it according to what money goal you are saving towards. For those debit card purchases you make, you can also choose to round up the purchase to put additional money toward your goals.
Lastly, you can make your goals public, be held accountable, and ask for help from anybody to achieve your money goals. Having accountability partners and meeting money goals as a community is a great way to financially empower everyone.
The Money Wrap-Up
The cash envelope system is the best budget when you need to reign in your spending. The inflexibility of it is a feature, not a bug. By using the cash envelope system, anybody can get out of debt and stop overspending.