The Envelope Cash System – Mrs Breathe Easy Finance
When I was in college, I worked a part-time job to be semi-independent and support myself. I wanted to be able to afford groceries and other basic necessities, without having to constantly rely on my family.
I worked in an office as a student secretary and got a small bi-weekly paycheck. I remember going to the bank, cashing my check and the bank teller would hand me an envelope.
I would get back to my dorm room and quickly crunch the numbers. I separated the money and jotted down how I would stretch every cent for the next two weeks.
My budget was extremely tight, but using this method, I always made it to the next paycheck. I never starved or called my parents at home for assistance.
Little did I know at the time that I was implementing a form of the envelope system. I think we need to bring back the use of cash.
This was alluded to in the post about saving more and living better during holiday seasons.
For those who are not aware of the envelope system,
Table of Contents
What is envelope system definition?
Cash envelope system is a system in which budgeting is done using cash only method. It is a simple way to divide your spending into different categories with each category having its own distinct envelope. The different categories help keep the spending separated and organized. This system is famously associated with Dave Ramsey.
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What is in your wallet? Cash envelope?
In the voice of Dave Ramsey, “What’s in your wallet? Cash.” We are putting way too much faith in those plastic rectangles in our wallets. I always say cash keeps me honest. The envelope system is a tried and true method because you can physically see the cash and determine your spending. Cash in your hand can be difficult to part with. I will literally walk around a with $20 dollars in my purse for weeks and be very selective on what I would spend it on. Yet, I will swipe my card to spend $20 dollars in a heartbeat.
Before going to the next section, check out our 12 toddler steps to financial freedom and Financial pyramid to put your financial life in order to get the basics.
How to implement the Envelope cash system
Here is how to get started: Sit down and budget out your monthly spending. Label an envelope for each expense and write the allotted amount on the envelope. You should have an envelope for bills, debt and monthly spending. To be precise, you should break monthly spending down into categories. Some examples of monthly spending are groceries, dining out, entertainment, clothing and gas. The key is to be exact as possible without becoming overwhelmed with envelopes. When you get paid, place the money in each envelope as budgeted. Give special detail to the area in which you struggle.
Be Disciplined
Be mindful of your lack of discipline in any particular area. If you always go over your budget with groceries, then that will be your area of focus. If there is $200 dollars in your grocery envelope that is all you spend on groceries. Therefore, if your bill is 205 dollars, you must return an item to the shelve. The envelope system only works, if you abide by the rules. You cannot go over budget or borrow from another envelope. The cash you have is all you can spend. You are not allowed to use a card for additional money.
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What to do with the leftover
What do you do with the leftover money, if you ended the month with a surplus? Good job! The envelope system worked for you.
Spending less than your anticipated budget is the ultimate goal of the envelope system. My first recommendation is to pay off any outstanding debt, if you have money left over.
The envelope method is tailored to those in debt or who are simply having difficulty handling their monthly finances. If you are debt free, you can roll the money over into next month’s budget or use it to reward yourself.
What is “Blow Money”
Depending on your finances, some families have what is referred to, as blow money. Couple’s with a “blow money” envelope shouldn’t be financially strapped, but use it as a method, to be accountable for every cent. It’s a recreational envelope so to speak. I know a couple who both have a $150 budget each for their “blow money envelope”. The wife uses her money to fund her Starbucks habit and her husband buys random things throughout the month. I’m all for the “blow money” being a part of the envelope system, if you are debt free. If not, don’t spend money on Starbucks or random items, when that money can be used to make an extra payment towards paying debt.
Make the System Yours
There is no one size fits all when it comes to a monthly household budget. Make the envelope system work for you. Most of our bills are auto-pay. I prefer this method because I don’t have to remember payment schedules and therefore avoid late fees. If you struggle with making your payments on time due to forgetting or being unorganized, you might want to try auto-pay. Making late payments does not only disrupt monthly budgeting, but it’s the kiss of death for your credit score as well. We don’t realize that in terms of credit, it’s not good enough to make the payments. Your payments need to always be on time. Since, auto-pay works best for me; I’ve eliminated the bills envelope. All our bills are paid electronically and we never touch that money. We also don’t interfere with money for savings/investments; they automatically go in the appropriate accounts.
Stick with it! It takes time and discipline. If you want to get out of debt or have a better grasp on your spending, the envelope method is for you. The process of counting money and managing envelopes can be intimidating, in comparison to swiping your plastic and moving on.
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I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
xrayvsn says
I have not ever used the envelope system but I do believe in its merits. It is indeed much harder to part with cash than to swipe credit.
A lot of businesses realize this and play it to their advantage (Dave and busters and other arcade games want you to put money on a plastic card so it is much easier to spend it quicker on games)
admin says
It is all about self discipline. Sometimes, i want to clap for those that use it to their advantage. The genius of it. So far, the modified method has saved us tons of money. For many high income earners and a guru like you, you don’t need the envelopes for budgeting, do you even have envelopes in your house? maybe golden envelopes haha. Thanks for stopping by.
Smart Money MD says
Do you think that you’d have the discipline to use an envelope system but actually use a credit card so that you can have a small return in points/cash back? I wondered if I had known about this savings modality when I was in college…perhaps I wouldn’t have asked my parents to supplement my income then!
admin says
I think everyone can modify the system to work for him or her. Some credit card points are too good to ignore, so there is room to do both.However, if you are not disciplined, forget credit card altogether. Sometimes,the point might not be worth it. You are lucky to have parents to supplement your income. In my case, money was harder to come by, so I learn to manage what I had. Thanks for stopping by and for commenting.
MrsOgg says
I loved finding this post! I’m a doctors wife and we are on Baby Step 2. We are about to start using the envelope method. Though my husband is a high earner we are eager to pay off our student loans as soon as possible. Anyway, just enjoyed seeing your perspective! 😊
admin says
Hi, team member!! I am glad you found our site. It is common for people to think they can out earn foolishness like Dave Ramsey says. I am glad you are being wise with your money. The income is immaterial, it is about habit. This is why it has been said: if all the money in this world was distributed equally among everyone, fast forward 30 years, the money would have redistributed to the same people who were rich before. It goes to show that it is the mindset that actually makes one rich. Thanks for stopping by, grab your budgeting tip Ebook on the home page.