How to Use A Cash Envelope System

So far I’ve talked about a lot of things that have not worked super well for me. Today I’d like to talk about something that does work for me.
At this point, I’m almost positive that every single person that even just skims articles about personal finance is familiar with Dave Ramsey and the cash envelope system. If not, I’m here to help. I do not attribute the idea of the cash envelopes solely to Dave Ramsey, though he was relatively instrumental in bringing it back in style.

But why would you want to do that?

  • You are less likely to impulse purchase because it’s psychologically more difficult to part with actual cash.
  • If you are a visual person, being able to see how you are doing with each category can be incredibly eye-opening (see what I did there?).
  • You become much more aware of how you spend, where you spend, and what you buy.
  • It’s a lot harder to spend money you don’t have when you’re envelope is empty.
  • You can’t swipe an envelope. You also can’t overdraft an envelope.

 

The concept of the cash envelope system is very simple:

  • Make a Budget
  • Decide the Rules
  • Divide your Cash
  • Put it in the Envelopes
  • Follow the Budget

 

Make a Budget

It is very important when you first begin any new financial change that you make a pretty decent budget. It’s best to track all of your expenses for a month, but if you’re pressed for time it’s okay to list all of your expenses and all of your income. Once you’ve written everything down, you can decide on your important budget categories and the expected amounts. You can have an entirely cash budget or do a partial cash budget. Either way, this is the part where you figure out how you want to prioritize your money.
 

Make the Rules

This is an important step in the envelope system. You are less likely to talk yourself into something if you have established the rules prior to beginning. This is not to say you should not be flexible in the beginning because you may need to make some changes to better suit your needs.
Some possible rules are don’t borrow money from other envelopes, or put all extra money into savings. This is where you really make it your own.
 

Divide Your Cash

Once you have figured out your categories and the amount you have budgeted for each envelope, skip on down to the bank or ATM and make your withdrawal! It’s time to start this party!
 

Put it in the Envelopes

The envelopes are pretty essential in the system but that doesn’t mean they have to be super fancy. You can make your own envelopes out of paper or fabric, use simple mailing envelopes, get pretty pre-made envelopes, or even get a special envelope wallet. Personally, I use these check size envelopes.  The envelopes don’t need to fancy or pretty as long as they work.
 

Follow the Budget

In addition to continuing to follow the budget, it’s important to review and update your cash budget as needed.
 
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Have you set up a cash envelope system? How do you set up yours?

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