The cash envelope system is a system in which you put aside the cash you intend to spend that month in envelopes based on your budget categories. In this post, I will focus more on the cash envelope system category system for beginners.
But before we go on to discuss the categories, let’s discuss a few things about this envelope system.
The cash envelope system, popularised by Dave Ramsey, is not a new phenomenon as it has been there all along. I can testify that I first heard about this almost thirty years ago growing up in Africa.
Some religious leaders used to promote this method of setting aside cash in envelopes for each expense as a way to control expenses.
The way it works is that once you get your pay you will withdraw cash that you need to spend and put it in envelopes. For instance, money for groceries will be put in one envelope, money for car maintenance in another, etc.
The idea is that when you want money for groceries you will get it from the grocery envelope and you are not allowed to dip into other envelopes.
The same will apply to all other categories. You only spend what has been allocated to it and put it in its envelope.
If money for groceries is exhausted then you cannot buy any more groceries. You may have to find other ways of getting what you want.
At the end of the month, you will check each envelope and take that into account in the preparation of the next budget.
Cash Envelope System Categories For Beginners
The cash envelope system categories are based on the budget lines for non-fixed expenses. Therefore the first thing that needs to happen is the creation of your monthly budget.
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In considering the cash envelope system you ignore the fixed costs such as internet charges, loan repayments, etc as these are out of our control.
You however still maintain control of costs such as groceries. It is such costs for which this system was created.
There is no point in having envelopes for internet costs, insurance, as they are outside of our control. If you are supposed to pay $20 for the internet you have no choice but to pay.
Below are some examples for the cash envelope system.
Groceries are probably one of the most controllable lines in any budget. It is also one of the biggest variable costs in any family budget and therefore needs special attention.
To avoid starving yourself I would advise that in budgeting for groceries you be as thorough as possible. You can easily do this by reviewing your previous months’ expenditure and projecting it to the month you are creating the budget for.
A the end of the month you then put the amount assigned for groceries in their own envelope. For every shopping, you will have to take out the money from this envelope and this envelope only.
Another cash envelope will have all the money assigned for entertainment. The rules for utilization will be the same as for groceries above.
3. Person Care
Personal Care is another cost that qualifies for this system and is also subject to the same rules as all the other categories.
Clothing is yet another expense that can be allocated an envelope.
5. Eating Out
Eating out is one of the expenses that can easily get out of hand if not controlled properly. This is easily done if you follow the rules of the cash envelope system.
If you exhaust the funds in this envelope then like is the case with the other categories then you cannot dip into other envelopes.
6. Pet Expenses
If you have pets then you can have another envelope for all expenses towards care for your pet.
7. Household Goods
You can also have another envelope for household goods. I am thinking here of things like the purchase of plates, juicer, etc.
How About Emergencies
Another tricky area to consider is emergencies. These come at unexpected times and can lead to expenses that you haven’t budgeted for.
How can you deal with these when operating the cash envelope system?
There are two ways you can deal with this.
Firstly you can choose another envelope where you will set aside money for emergencies. This means that every time there is an emergency you will get money from that envelope.
This only works if the funds in that envelope are sufficient to cover those emergencies. Unfortunately, life is more complicated than that sometimes.
Secondly, you can choose not to have another envelope but to deal with emergencies as they come. Thus in an emergency, you will be allowed to dip into other envelopes to cover that emergency.
I would suggest that you combine the elements of both. Where you set aside money every month for emergencies and be flexible enough to take money from other envelopes to cover the emergencies.
Emergencies are the only expenses where you are allowed to use other envelopes cash if necessary. Otherwise normally for all other expenses, you cannot dip into other envelopes to cover expenses in another.
Can the Cash Envelope System Categories Change?
There is nothing permanent about the categories here. You are free to change the number and names of envelopes. Nothing is set in stone.
As such, you can change the categories if there has been changes or you just want to change them.
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As you can see the cash envelope system will help people to control their expenses. However, this is all dependent on the willingness of the user of this system to follow the system to the letter. A control system is only as good as the person putting it into effect.
In this post we have focused on the cash envelope system categories. These categories are all based on the lines in your family budget. Budget lines are flexible and the same applies to the cash sytem categories which rely on it.