How To Use The Cash Envelope Method
September 7, 2021
How can you use the cash envelope method?
- Identify your monthly expense categories
- Label each envelope accordingly
- Set a budget amount for each category
- Spend only from the envelopes
So you’ve been working on creating a budget and trying to stick to it. Yet every time, you continue to overspend. Why don’t you learn more about how to use the cash envelope method?
It has been long established that when it comes to budgeting, one needs to be held accountable. The cash envelope method is a tangible way to budget how much you can spend every month. It works by placing your cash inside different envelopes based on budget categories.
The cash envelope method aims to avoid overspending by limiting what is available to spend. If you know you tend to overspend on things such as impulse purchases, this method can help budget your money every month and achieve financial goals better. Here is a complete guide on how to use the cash envelope method:
Identify Your Monthly Expense Categories
The first step in the cash envelope method is to identify what categories you spend money on every month. Tailor your categories according to your living situation. Here are some of the common expense categories you may include:
- Personal Grooming, Beauty, and Health
- Dining Out
- Utility Bills
- Household Items
- Pet Items
- Hobbies and Entertainment
Label Each Envelope Accordingly
Use one envelope for each expense category and label them. You can write the category name in front of each envelope. Another good way to avoid confusion is to use different colors for each envelope.
Set A Budget Amount For Each Category
Next, set a budget amount for each expense category. Remember that the total budget amount for all categories should not exceed your monthly income.
To find out what a reasonable monthly limit for each expense category is, try collecting your receipts or banking statements. You can use the amount breakdown as a basis or if you are trying to save, set a slightly smaller budget amount.
Withdraw your monthly salary and put the allocated budget amount for each envelope. Every time you receive your salary, add that to the envelopes according to each budget. For example, let’s say you have a P7,000 budget for groceries. When you get your first salary on the 15th day of the month, take out P3,500 and put it in the envelope. When you get your second salary, do the same thing.
Spend Only From the Envelopes
When you need to go grocery shopping, pay a bill, or spend money for any reason, take the appropriate envelope for spending. Make sure to spend only the provided amount from each envelope and do not pull money from other envelopes just to pay for an item.
If you have extra money left in any of the envelopes at the end of the month, you can roll it for next month’s envelopes or add it to your savings account.
Following the cash envelope method can be challenging. But remember, sticking to your budget is a critical factor for avoiding overspending and reaching long-term wealth goals.
In this article, we discussed how to use a cash envelope. The cash envelope method works and it is ideal for impulsive buyers and those who are new to budgeting. It helps set financial goals and avoid overspending. With it, you can take charge of your finances in a hands-on manner.