Finance

How to Save Money Using the Cash Envelope Method

November 7th, 2020

Modern technology has made pretty much every aspect of our society way more convenient than it used to be. It’s easier than ever to stay in touch with loved ones, purchase household items, and manage your money online. Credit and debit cards especially have made it convenient to run errands or go grocery shopping without having to stop at an ATM first. 

However, as society goes increasingly cashless, credit and debit cards are also making it easier to overspend. In part this is because it’s easy to feel like you’re not spending “real” money, which means you tend to spend more of it. If you find yourself overspending every time you run into Target for one thing, you may benefit from the cash envelope system. Here’s how it works.

1. Figure out your budget.

You won’t get very far without a budget, which is why it’s the first step. If you don’t have a budget yet, sit down and make a list of your monthly expenses. ALL of your monthly expenses. Don’t forget things like gas for your car, entertainment, even takeout if you regularly spend on it. Divide each expense into broader categories before moving on.

2. Make an envelope for each category. 

When you’ve figured out what your general budget is for each category, then you can start making envelopes for the categories. If you have major expenses every month like a mortgage or credit card payment, don’t worry about making an envelope. You won’t mail in cash payments for these, just a check. Instead, focus on things like groceries, clothing, entertainment, et cetera. If you’re using paper envelopes, simply write the name of the category as well as the amount you’ve budgeted on the outside. This will help you keep track of how much goes in which envelope. 

3. Put your cash away. 

When you get paid, or whenever you receive your monthly income, you’ll take the total amount you budgeted across your different categories out of your account. (Remember those major expenses we just talked about? That’s the exception—leave money to cover those in your account!) Once you have cash in hand, you’ll then divide it among your envelopes.

4. Track your spending. 

When you’re making purchases, take only the amount you need from each envelope. Once you’ve spent that money, subtract it from the total amount so you can see what you have already spent and what’s left. If you’re using a paper envelope, you can simply keep track of the amount on the outside.

And that’s it! Ideally, you’ll have budgeted well enough that you’ll spend only what you need, without having to dip into other categories. There might be some months where you spend a little extra on, say, food, but hopefully you’ll be able to borrow from a less important category, like entertainment. One of the biggest upsides of this budgeting method is that you’ll be able to visualize your spending better, meaning you’ll always have a grasp on how much you have. In the long run, this can help you curb unnecessary spending and save extra money.

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