Do you tend to overspend in one area or another? Are you looking for an effective way to cut your overspending and get back on track? Cash envelope system will help you do that. And not just that, it will help you to get out of debt and grow your wealth.
It is how our grandmothers managed household budget way before the advent of modern technologies or credit cards. Recently, it was made famous by Dave Ramsey, a personal finance expert.
What is cash envelope?
In the envelope system, you organise your cash in different envelopes or separate it with paper clips. Money for different categories goes into different envelopes. Some of the categories can be food, travel and clothes. With the envelope system, you can easily see how much you have left in that envelope.
Why cash envelopes?
It has been seen that people spend more when they use plastic money than when they are using cash. It is because people can see their money exchange hands and are directly affected by it.
These envelopes help you to fight against overspending and manage your money well. It will make conscious of where your money is going. Envelope system will keep on track. It brings a shift from unconscious shopping to spending money with intent. It makes you disciplined with your money and makes you accountable for all the spending decisions.
We all have some problem areas where we tend to overspend. Whether it is drinking or going out with friends. Cash envelope especially takes care of our Achilles heel. So now you have a valid reason to refuse your friend’s invitation to any party. Don’t worry you can give yourself a treat next month if money still lying on your envelope after the month.
1. Create categories that need cash envelopes. Some of the categories can be groceries, restaurants, salon, entertainment etc.
2. Create a monthly budget or cash limit for the different categories. The aim is to fix the leakages in your budget. Fix how much you would want to spend on various categories and follow religiously.
3. Create and fill these envelopes
After the salary day, withdraw the money to fill the cash envelopes. After that, write the different categories on these envelopes. Fill these envelopes with cash according to the max limit that you have set. So when you are going for grocery shopping, take money from the grocery envelope.
4. Use the cash only for the specified purpose
Don’t use cash from other envelopes to buy things that belong to other categories. If you exhaust the limit of a particular category, then try to do some ‘jugaad’. For example, if you exhaust your grocery amount, you can easily find something to eat if you look at your pantry carefully.
You may use online shopping platforms to buy things that fall in the cash only category. In this case, you can pull out the amount that you have used online from the specific envelope.
Keep all debit and credit cards except one out of your sight so that you don’t get the urge to swipe these cards.
Keep at least Rs.500 to Rs.1,000 in your wallet as emergency cash. Just to be clear, ordering pizza does not count as an emergency.
Go slow. You can first try it for 15 days if you are sceptical whether it will work or not.
Treat yourself if you have money in your envelope at the end of the month.
Conclusion: The cash envelope method will curb your tendency to overspend and make you a disciplined buyer. You will be more conscious of your buying habits. With your spending under control, you will have more money to pay your debts and invest in your goals.
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