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How to Budget Better with the Cash Envelope System

Written by Jessica Steer
If you stress over your monthly expenses, or are living paycheque-to-paycheque, the cash envelope system will give you quick-and-easy control of your money. With this simple-yet-effective budget system that uses real or digital envelopes, you can take the stress out of money management and get a better handle on your personal finances.
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    What is the envelope saving method?

    Throughout the years, countless saving enthusiasts and advisors have suggested a budgeting system that’s highly effective due to its simplicity. All you need to do is figure out your monthly discretionary expenses, set physical cash aside for those expenses in different envelopes, and once there’s no money left in that envelope, you stop spending.

    The cash envelope method works because you have no choice but to stop spending your money when there is nothing left. Critically important, also, is how you’re effortlessly and always aware of what you have left.

    Before we had digital transactions and instantly available credit, cash purchases were easier to track and register. With now-common spending tools like tap-to-pay credit card technology, we rarely see the immediate impact of our spending, nor do we notice what we have left.

    When we lose track of our expenditure, we overspend. The cash envelope budgeting system prevents that. You will be in control of your money, instead of it controlling you.

    Another highly desirable benefit of using this system is that it will likely reduce your spending, without creating as much temptation to overspend. People tend to spend less when they use cash. If you have savings goals or other expenses that need to be covered, the envelope system can get you there sooner. Plus, you’ll enjoy fewer overdraft fees and less credit card interest!

    The self-awareness and discipline that you acquire will give you the confidence and skills to succeed with other financial goals too. The envelope system will you develop mindfulness about your spending and help you minimize splurges, impulse purchases, and other detrimental behaviours. 

    How to get started with the cash envelope system

    Let’s break down the decisions you need to make in quick-and-easy steps: 

    Before you start:

    1. Track your spending to get an idea of where your money is going. Most banks and credit card companies have free online tracking software already running in the background. And there are many great budgeting apps to help you too. It’s a great place to start, short of manually recording every expense yourself.
    2. Check your calendar for upcoming expenditures and regular, fixed payments. 
    3. Highlight any spending areas that are particularly problematic for you. If you only want to work with a couple of envelopes at first, pick the areas where your wasting the most money (i.e. clothes shopping or dining out.)
    4. Set ground rules for the system, especially if more than one member will be responsible for family spending. You need to consider who will need to carry the envelope(s) for each category, what to do about emergency spending, and what happens if you run out of money in a category.
    5. Prepare to make adjustments to your plan; nobody gets it right the first time!

    Step 1: Determine how much of your total budget goes into envelopes.

    To achieve success with an envelope system, ensure that your budget reflects your needs in a realistic, manageable way.

    Distinguish between your fixed expenses which are unchanging, and your discretionary expenses. In the digital age we live in, you likely won’t need to create an envelope system for “fixed expenses.” Since many, if not all of them, can be deducted straight from your bank account (mortgage, insurance, utilities, car payment, loans), it’s taken care of for you. 

    It’s always a good idea to set-up automatic withdrawals for any debt you owe so that you won’t accidentally spend from those envelopes.If you don’t have automatic withdrawals set up for regular, fixed payments, they need to be part of your cash envelope system.

    Once you’ve deducted your fixed expenses from your monthly net income, the amount remaining becomes the basis of your Cash Envelope System - for necessary and optional expenses. 

    Next, you need to assign spending categories.

    Step 2: Choose spending categories.

    This is where you figure out just how many envelopes you’ll need. Start with the categories you have the most trouble with. For example, when you review your previous expenses and spending patterns, you might find that you spend far too much money dining out. You might want to start there. Set a monthly budget for dining out and stick to it! Remember, if you greatly reduce your eating out costs, you might need to allocate a little more to your groceries fund, but as long as you’re making savings in the long run, that’s okay!

    For categorization, colour-coding might help! For example, green (means go), for different “necessity” categories, and yellow (be-prepared-to-stop light) for optional expenses.

    Here are essential categories for you to consider:

    1. Groceries: every saver will have an envelope for their grocery store fund
    2. Transportation: gas, public transit, Uber/Lyft
    3. Clothing: shoes, clothes, dry-cleaning, growing kids
    4. Entertainment: movies, eating out
    5. Miscellaneous: unexpected guests, forgotten birthdays, car repairs, haircuts
    6. Me: a little treat, for a successful envelope-budget month

    Some people prefer a monthly system, yet for others, filling the envelopes at every pay period works far better. Both approaches work, so pick the one that best suits your circumstances.

    Step 3: Allocate the right amount of cash into each envelope.

    If you’ve never tracked your expenses before and don’t know where to start the highly recommended 50-30-20 budgeting rule provides a good foundation on where your money should be going. All the cash that your withdraw for your envelopes should not include savings or fixed expenditure for things like rent, bills, etc.

    Use the information gathered from tracking your expenses to figure out how much you should allocate to each envelope every month. You might not get it perfect on your first try, but don’t be discouraged! Simply tweak the categories and amounts the following months until you have a system that works for you.

    How to do the envelope system without cash: digital envelopes

    Digital envelopes can be a bit tricky since digital transactions aren't as painful as having to fork over crisp dollar bills. But if you want to take advantage of those sweet card rewards points, you can employ the envelope system for your digital finances too.

    Here are two options to try:

    Option A:

    1. Open different checking accounts and savings accounts for each category. If they’re at the same bank, you can transfer money around quickly. If that easy accessibility is too tempting, make it harder with accounts in different banks.
    2. Assign each account, or credit card to one of your categories. 
    3. Next, load each account with the money for that ‘envelope.’
    4. Then, you will need to select the correct debit or credit card at each purchase. Be very strict with yourself about paying in full, any credit card charges as soon as your monthly statement arrives, to stay on track.

    Option B:

    1. Mvelopes is an Android- and Mac-friendly app that manages your envelope budget system for you, once you’ve set it up. Its flexible and customizable features let you link to many different banks, PayPal, and credit card accounts. You can assign “money” and accounts for each category, and Mvelopes tracks your spending. You can even assign manual payments. Various levels of service are available.

    Remember: Cash envelopes can only work if you avoid borrowing from other envelopes, so a little discipline is important from the get go if you want to form good practices and see fast results.

    If you do stick to the plan, the cash envelope budgeting system provides a quick-and-effective solution to overspending. Feel free to adjust your envelopes until it works for you, but you’ll soon see that a few paper envelopes and a little perseverance will make all the difference to your finances.

    Give it a try and start today!

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