How to use the cash envelope system to control your budget

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The envelope system is a good way to save money.

It works by allocating funds in envelopes for certain categories (e.g. dining out, shopping, movies, etc.). Once you spend the money in the envelope, this month is enough. You can’t spend more money.

This is a good system if You are in debt, Because it forces you to be actively aware of your expenditures-but is that what it is all about?

Let us analyze in detail how the envelope system works, why it is good, and some of the disadvantages of using it.

What is the cash envelope method?

The cash envelope system is a simple way to control expenditures. Every month, you have a certain number of envelopes, and each envelope is dedicated to paying a certain type of fee. You allocate a certain amount of money to each envelope, and this is the money you must spend on this fee that month. Examples of fees may include:

  • Housing (rent, utilities, etc.)
  • Food (grocery purchases, takeaways, dining out, etc.)
  • Entertainment (streaming video subscriptions, books, etc.)
  • Student Loans
  • Savings

Although traditional envelope systems use physical envelopes and actual cash, there are more modern methods.Tools like this envelope Using the envelope system online follows the same principles, but allows you to track your expenses digitally. This may help because many types of expenses—from Uber rides to student loan payments—cannot be paid in cash.

What are the benefits of recharging?

You may also see the envelope method called cash filling or cash envelope filling-but they are all the same. Regardless of its name, this approach has some obvious benefits that can help make it easier to establish and maintain a bulletproof budget. Following this strategic approach, you can:

  • Set up and reach Clear savings goals And achieve them effectively through conscious and regular contributions to your goals. By actively allocating a certain amount of cash to your goals every month, you can avoid spending money elsewhere and then getting nothing.
  • Avoid impulsive consumption. Once you have used up the money in the given envelope, it is the money for this month. You (in theory) should wait until next month for more.For the tendency to consume impulsively (and then experience Consumers regret), which can be a way to improve consumption habits.
  • Take a hands-on approach to fund management. This method turns Money management And convert the expenditure into a tangible process. If you use the old-fashioned way of using physical envelopes, you will know every dollar you spend every time you reach into the envelope to get cash.
  • Become more self-disciplined in relation to money. By requiring you to consciously plan and think about how you spend money, cash filling teaches discipline.Ultimately, it can help you better control your finances and eliminate Money-related fear When you feel that your financial situation is out of control.

The advantage of the cash system lies in its psychology. It doesn’t require you to completely quit things you like-like latte in the morning.By assigning envelopes for necessities (such as rent) and interesting things (such as entertainment), you can practice conscious spending: you spend Dial your money -Things you cherish and enjoy-instead of denying all your happiness.

How to start using the cash envelope system

Another benefit of the cash envelope system is that it is easy to implement. You don’t need to modify complex Excel spreadsheets or purchase expensive software to get started. You can start topping up in your budget next month. Here is how to prepare for success.

Create a budget Or conscious spending plan

Before you start filling the envelope, you need a clear budget.Following Conscious consumption pattern, Your budget should include the necessities of life and “extra expenses” that you don’t need but can improve the quality of life. Your overall budget can be divided into four parts:

  • Fixed cost Such as rent, utilities, food, insurance, healthcare, debt repayment, and transportation
  • invest Such as funds, stocks and bonds
  • Savings Like cash savings or retirement savings 401(k) or Ross Irish Republican Army
  • Innocent consumption About “wants” that make everyday life better, such as your Netflix subscription or your favorite luxury

After sketching the budget, you can continue to build the budget system—in this case, the envelope method.If you are making a budget for the first time Check out this simple beginner’s guide. Even if you do not insist on recharging cash for a long time, having a clear budget planner will help you with overall fund management.

Create spending category

Following Conscious consumption patternTo create spending categories within your budget. Suppose you have a “savings” bucket. You can further divide it into three categories, such as saving for emergency funds, saving for special occasions such as birthdays and holidays, and saving for specific goals such as cars. Each of these secondary budget categories will receive their own envelopes later.

Set appropriate spending limits for each category

After finalizing a conscious spending plan and defining spending categories, you can continue to answer the big question: how much will you allocate to each category? In some cases, this will be determined by external factors. For example, your fixed expenses (such as rent and car payments) are not negotiable.

Two popular budgeting methods for sharing costs are the 50/20/30 and 70/20/10 rules. The 50/20/30 principle means that 50% of the after-tax income is used for daily necessities, 20% is used for savings and debt, and 30% is used for the rest. The 70/20/10 rule means that 70% is used for expenditures, 20% is used for savings, and 10% is used for donations.

However, these are not hard and fast rules, and you are free to formulate your own guidelines. The point is to cover all four expenditure categories (fixed costs, investments, savings, and innocent purchases), and then set reasonable limits for each category (and the second-level envelope category within that category). Everyone’s budget is unique.

Fill in your cash envelope

Now is the fun part: cash filling! If you want to go to school, you need envelopes, labeled things, and cash. This leads to a disadvantage of this method: you have to go to the ATM to withdraw cash from your envelope. However, as mentioned earlier, the tangible act of taking money out of the pouch is part of the success of this method. This is a psychological technique that allows you to fully cherish every dollar you spend.

Or, you can use technical tools such as Mvelope to digitally allocate enough funds for your various virtual cash envelope wallets. This is very convenient, especially for online payments.Some Modern budget app You can also link a credit or debit card to your bank account to automatically track expenditures. However, these extras will weaken the psychological power of the original envelope method.

Transfer cash to next month or adjust expenditure

When you set up the envelope method for the first time, create a budget that will be zero at the end of the month-which means that every dollar of the four buckets allocated to you should be spent. As you progress, you may have cash remaining at the end of the month. For example, maybe you canceled an Amazon Prime subscription that you never used, joined a coupon program to save on groceries, or paid off your car.

When this happens, it’s time to adjust your budget and how to allocate funds to the envelope. You can adjust your spending—for example, by giving yourself more money in the innocence category—or transfer your cash to the next month. This helps to create a useful buffer for the future.

Take control of your financial future

Cash envelope budgeting is one of the many tools you can use to improve money management and achieve financial goals.With its psychological impact, this is a good way to avoid overspending, which is great for those struggling How to save money (Or find yourself living from one payday to the next).

This method is also about letting oneself have greater agency for one’s own money, demystifying the budget, and simply decomposing it. It also allows conscious consumption, ensuring that you don’t have to deny your favorite pleasures.Ultimately, this will develop the mentality you need Realize your prosperous lifeTo learn more about how it works with our six-week plan, you can find the plan in the book I will teach you to get rich.

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