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Cash Envelopes: A Time-Tested and Effective Budgeting Method

Cash Envelopes: A Time-Tested and Effective Budgeting Method

| February 11, 2023

With the prevalence of credit cards these days, it can be challenging to stick to a monthly budget. All it takes is a swipe of your credit card, after all, and whatever you want is yours, which obviously isn’t always great for your financial picture. As a result, many folks are turning to the envelope method, a tried-and-true form of budgeting that’s been around the block quite a few times.

If you’re looking to rein in your spending, you might want to consider this type of budgeting as well. It works for many people and might just work for you too.

What is the Envelope Method?

Let’s start by talking about how the envelope budgeting method works. Traditionally, this system was a physical cash-based approach to budgeting. Nowadays, it can also be performed virtually. The basic idea is to assign a certain amount of money (i.e., “cash”) to various spending categories (“envelopes”) and stop spending in a category when you run out of money.

How Does it Work?

Follow the below steps to use this method:

  1. Determine your monthly income – Add up all your sources of income to figure out how much you expect to bring in for the month. This income includes paychecks, earnings from side hustles, investment income, government benefits, alimony, and even one-offs like tax refunds.
  2. Establish budget categories – Review some older bank statements to understand where you typically spend your money. Then decide which variable categories you’ll include in your budget. (Leave out fixed categories like housing, utilities, and insurance.) Some common categories include groceries, auto fuel, personal care, entertainment, clothing, dining out, gifts, and home décor.
  3. Assign amounts to each category – Next, taking your anticipated monthly income into consideration, determine how much you want to put in each category. Make sure your amounts are realistic.
  4. Spend but stop when the cash runs out – This is the crucial step. You need to be disciplined and stop spending in a category once its cash runs out, so you stick to your budget. While you can opt to move money from envelope to envelope, this might leave you with a shortfall in a category.

What are Envelope Budgeting Apps?

It’s common not to carry physical currency anymore. So can this budgeting method work if you primarily use a debit card instead of cash for purchases? Definitely. There are multiple envelope budgeting apps out there that exist for this purpose.

One example is the app YNAB. In this case, you assign amounts to digital buckets that you’ve set up in your app. Every time you buy something, it gets categorized and deducted from the appropriate bucket. This allows you to enjoy the convenience of paying for items and downloading financial transactions electronically while still adhering to an envelope-style budget.

Takeaway: The Envelope Method Takes Time and Effort But Can Curb Overspending

While there are lots of different kinds of budgeting methods and tools available, the envelope budgeting system has withstood the test of time. When you use it with physical cash, the tactile experience of taking your money out of an envelope will no doubt make you more aware of what you’re spending – and hence, less apt to overspend. Used digitally, it’s still effective because it motivates you to consistently track your spending and think twice when a bucket runs out of funds. If you struggle to stick to a budget, the envelope method may just help you do that.