The cash envelope system is a great way to get a hold of your finances. It gives you control over your money and allows you to tell your money where to go. Many people have paid off thousands of dollars in debt using this system. This is how it works.
Start with your budget
Looking at your budget, highlight the expenses that are variable; That is, expenses that fluctuate every month. Some common examples are groceries, dining out, clothing, entertainment, gas, etc.
Label each envelope with the category
Write down the name of each category on an envelope. Some people write the amounts of each transaction on the envelopes as well. If you think that would be helpful, give it a try. As for us, we just write the total amount of cash that goes in the envelope as a quick reference for how much to put in there every month.
Stuff cash in the envelopes
Your budget should dictate how much cash you put in each envelope. For instance, if you have budgeted $300 for groceries, then put $300 in the Grocery envelope. Then do the same for each of the different envelops you have created.
Only use the money in each envelope for that category
It can be tempting to use money from the grocery category to go to the movies, however, then you will likely not have enough money left to eat for the rest of the month. It will take some trial and error. If you realize that a budget set for a given category isn’t realistic, discuss it with your spouse and consider adjusting that category. We have a budget meeting almost every month to go over our finances together as a couple and I highly recommend you do too. If you don’t have a spouse, consider finding an accountability partner. Find someone who is going to help you stay on track and that you trust. Then meet with them at least once a month to go over your finances.
Have a goal in mind
When you are using the envelope system, it can be extremely helpful to have a goal that you are trying to attain. When we started using it, we wanted to pay off $52,000 in debt. Any extra cash that we had left over at the end of the month went toward our goal: paying off debt. Now that we paid that debt off, we want to pay off our mortgage. Keeping this goal in mind, helps us to understand why we don’t want to overspend and gives us motivation to stay within our budget.
What is a goal that you are trying to achieve? Have you considered using the cash envelope system to help get where you want to be?