If you have been around the budgeting scene long, you probably have heard of the “cash envelope system”.  Proudly touted by Dave Ramsey, the cash envelope system was introduced to help you quit overspending and pay cash for everything.  It’s designed to keep you out of debt. Most people have a better chance of sticking to their budget if they can visually see exactly how much money they are working with.  So how do you set up and use your cash envelopes? Keep on reading to find out.

Budget Beginnings

To create a cash envelope system, you must start with a budget.  If you don’t have a budget, the plan simply will not work. You have to know how much money you have coming in and going out.  Write down any category in which you think you might spend money on during the month, and add it up. The total should be less than or equal to your monthly income.  This will help you see which categories need to become envelopes.

Categorizing Your Cash

After your budget is established, it’s time to figure out how to categorize your envelopes.  Most people have envelopes in the areas they tend to overspend like groceries, entertainment, eating out, car repairs, “fun” money, clothes, household items, etc.  You decide on how much money you want to put in each envelope per month, and divide that number by the number of paydays you have. So say you want to put $500 a month in your grocery budget.  If you get paid bi-weekly, you would put $250 in that envelope each payday. When you have all of your envelopes categorized and fully stocked, you will be holding all of your spending money for the month in your hands.

Tracking Time

It’s always a good idea to track your purchases within each envelope category.  So, for our grocery example, every time you use money out of the grocery envelope, you would write down on the envelope the date and how much you took out.  If you add money into the envelope, you write that down too. This will help you know if you ever need to increase the amount that goes into the envelope or even reduce it to fit your needs.  Once the money is gone out of the envelope, it is gone. There is no more money to spend in that category–so spend it wisely! If you have any money left over in a certain category for the month, roll it over into the next month and you will have extra to spend if you need it.  

Using cash envelopes is really easy once you get the hang of it.  Sure it may feel weird the first few times to pull out a wad of cash to pay for something instead of swiping a card, but the benefits of paying cash for everything far outweigh any awkwardness you may feel.  So give cash envelopes a try–you may find that it works for you.

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