Before I explain what the cash envelopes system is all about, let me say that I don’t actually use cash. Nor envelopes. That little detail has not stopped me from applying the principles governing the cash envelopes method in how my own everyday spending is managed.
If you are wondering why this rather obscure sounding approach to paying for stuff has been gaining momentum on social media (just google it), I have the answer for you – it works. It doesn’t matter whether you are on a super-tight or not so tight budget, if you want to avoid money literally falling through your fingers every month, cash envelopes are an immediate way to not only help you stick to your budget but also to physically SEE how you are spending.
This is how cash envelopes work:
- If you don’t have one already, write yourself a somewhat realistic budget (it’s fine to guesstimate if you’ve never done a budget before)
- For the everyday spending money such as food, coffee/lunch money, clothes and other small miscellany items prepare envelopes – I mean actual envelopes. Write your category and how much cash you are putting into it on the back. For example: Food £200, Work lunches £100, Clothes £70
- Put physical cash into your envelopes and put your envelopes into your wallet/bag/wherever you normally put the money when you intend on spending it. If you have a category which calls for a lot of money, you can divide it into spending cycles so that you don’t end up carrying wads of cash on the daily (for example, split your monthly food budget by week and only carry one week’s worth of money)
- Once it comes to paying for stuff, use the cash in the envelopes to pay for it and make a note on the back of the date, how much you spent and how much you have left so that you always have a running tally of how much money you have left in each envelope
You do not need to have daily access to your back accounts when you use cash envelopes. You do not need a credit card either. The envelopes as a money management method really help in cutting yourself away from a temptation to overspend.
Sounds simple? It is simple, but it also needs some effort on your part. The drawback of the envelopes is that you always have cash on you AND aside from the unlikely change of getting mugged (at least where I live) you have to show some discipline and respect for your own rules.
You might wonder, what happens if you mis-budgeted and run out of cash in the envelopes. There are three things that could happen:
- You go hardcore and STOP spending
- You borrow from another envelope which is under-spending/lower priority (record the amounts you move so that you know how to adjust your budget next time)
- You go and make more money
I will say that keeping the categories simple makes things easier – the less envelopes you have to handle the better you’ll get at it as well. In my case, the categories of the envelopes look like this:
- Money I can spend (food, clothes, going out)
- Money I cannot spend and don’t have with me (everything else)
I don’t carry cash, instead I put the total of the three categories in which I can spend in every month onto a Revolut prepaid card (review of the card here) and go the extreme way – if I run out of money on the card, there is no more spending.
Using the envelopes method certainly showed me where I overspend, where my perception of spending was unrealistic and where I spend less than I thought I did. Hand in hand with the budget, this method has made my financial life easier and more pleasant – remarkably, there is less information to keep track off because it all sits in a couple of envelopes.
Next week I will be talking about pets. Cats in particular, because these low maintenance creatures come with a tangible financial cost which nobody seems to want to talk about!