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Budgeting with Cash Envelope System Pros and Cons

4/22/2020

24 Comments

 

Personal Finance

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​I've been using the cash envelope system for 4 years now in handling my finances and it has helped a lot in tracking and controlling where my money goes. However, like any other budgeting methods, it's not a full proof system and has its pros and cons.

​What is a cash envelope system?
It's a budgeting system that uses only cash to pay for expenses other than obligations that are automatically deducted from your account.
How does it work?
Depending on the needs of your family, you will break your expenses into different categories and have an envelope prepared for each so that when payday comes, you will place the money on envelopes as budgeted.

The rule is:
You can only spend the money in those envelopes and if it runs out, then you have to wait for your next paycheck allocation. You ate also not allowed to move the money from one envelope to the other or you will be defeating its ultimate purpose which is control over cash spending.

Now, what are the pros of using the cash envelope system?
​
1.  Working only with available cash
In the cash envelope system, you are literally withdrawing your money and placing it on envelopes. So whenever you need to pay for something, you will be handing out cash and see immediately how much you have left after payment. This way, there is lesser risk of spending more than what you have allotted.

2.  You would have a budget for everything you need.
If you did your homework, you would be allocating every peso to a specific category on your budget which you cannot spend on anything else but for that purpose alone.

3.  Managed spending habits
This method establishes self-discipline especially for big spenders like I am. It makes you conscious of how much you are actually spending on which category and makes you stop when your budget ran out.
​
Heading over to the cons, what makes this system difficult to maintain?

1.  Excess fund on things I don't currently need and lack of fund to the things I do need.
There will be times when you really need money on certain things but you don't have enough saved up for it while the others remain full and untouched. It may be fine if it can wait but in some cases, you may not have the luxury to like when relatives come unannounced and you have to adjust your grocery budget to feed everyone. You may find yourself switching and taking cash from other envelopes and that defeats the purpose of the cash envelope system.

​2.  It takes time to budget everything especially when your cash is running low.
Other than a few priority cash outflows and sinking funds, there are several envelopes that you may or may not be able to spend on in a month but still, you would want to allocate cash to for fear of missing out.
Take for example choosing to allocate between movies, eating out or buying clothes. These are three things you spend on to maintain your lifestyle but in spite of that, you would still have to make a choice. Why? Because of the rule that you cannot take money from an envelopes unless you are using it for that purpose.

3.  Unnecessary cash on hand
Unless it's taken out of the envelopes and transferred in a bank account, your money will be sitting at home accumulating without you realizing it. Just think of it this way, Php600.00 doesn't seem so much but if you have ten envelopes with the same amount, that Php6,000.00 in total.

4.  Risk of losing your money
Losing an envelope means losing your whole budget for that expense account and unless you have an emergency fund to cover it up  you will find yourself taking money from other envelopes again.
​
​Can I adjust my budget?
Sure you can, but until your next allocation you would have to stick with what's in your envelope.

​I hope this article helped in deciding whether the cash envelope system suit you. Please leave a comment below and tell us whether this is budgeting system is working for you.

​
​-Aisiah Ezekyel

24 Comments
CA link
4/21/2020 10:51:14 pm

I've heard of this method before but I've only understood it thoroughly through your posts with the pros and cons. I might this as I have started learning to have a budget system just last year.

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Cristina Petrini link
4/22/2020 02:20:22 am

Interesting. I'm always looking for new ways to improve my savings!

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Krysten Quiles link
4/22/2020 04:52:22 am

I'm always open to finding new ways to save some money. This was super helpful. Thanks so much for sharing this with all of us!

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Amber Myers
4/22/2020 08:07:07 am

This is a smart idea. We budget well enough without them, but I know some people who could use these. They always whine they are broke and I'm like, "Well maybe stop shopping so much?"

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GiGi Eats link
4/22/2020 08:22:14 am

I have never heard of this system of budgeting before - but I am intrigued.

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Jessica Collazo link
4/22/2020 08:46:49 am

I've always wanted to try this envelope budgeting system but I'm afraid to lose the cash. And you know what?I believe in this system and I find myself talking to people that use this system and say is very effective but the Cons are very similar to yours.I know that there's a wallet that they sela that is for the envelopes system. I don't know how much it cost but I would like to buy it just for the purpose of doing the envelope system with my wallet instead of carrying around envelope full with money.

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Tessa link
4/22/2020 10:05:14 am

This is a great tool for a lot of people who want to manage their budget tightly. Growing up I knew a lot of people who had families that functioned this way well! I can also see how it would have the pitfalls you mentioned, and I know I am so used to paying with a card for everything that it would take some getting used to and be a little more inconvenient. Thanks for sharing this information!

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Adrienne link
4/22/2020 10:23:44 am

I used to do this years ago and kind of forgot about it. I should get back to it now that I don't have a steady stream of income with being laid off.

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World in Eyes link
4/22/2020 11:10:38 am

Very much Interesting! I always looking for new ways to manage the expenses and improve my savings...

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Kelly link
4/22/2020 12:28:31 pm

I have friends who have done this and swear by it. I never had discipline to try it, but I feel it may be a great time to try! Thank you for the motivation to give it a go!

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chad link
4/22/2020 02:39:46 pm

I've never tried this system before, very interesting! As this stage, I would try anything to be honest lol...Great idea.

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Marie Phillips link
4/22/2020 03:00:18 pm

I used to do this method years ago. It worked well at the time. Fortunately I have much more disposable income now so it isn't as critical to keep such close track of my money.

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Britt K link
4/22/2020 06:57:35 pm

I've heard great things about the cash envelope system, although I've never tried it myself. We rely HEAVILY on debit for everything, but I'm a spreadsheet addict, so I have our budget carefully planned out and am constantly updating, tweaking and improving that system as our lives shift and change.

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Brittany Charnley link
4/23/2020 12:36:53 am

we used to do the cash envelope system!!! it made me slow down spending because i didn't want to use my cash - hahah...now we just barely have anything to purchase besides groceries so we since stopped using that method.

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Nyxie link
4/23/2020 02:54:12 am

I like the concept of this but at the moment would find it difficult to get to an ATM to withdraw. I would also worry about misplacing the envelope whereas you can't misplace a bank account.

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littlemisadvencha link
4/23/2020 03:02:18 am

I know a few people who are using this system. Although, it's different for each one, I believe that with discipline, adapting this system is surely effective!

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Amanda link
4/23/2020 05:40:25 am

I have not heard of cash envelope budgeting but it seems like a great way to control spending. I have worked very hard the last 5 years since my divorce on budgeting and saving, and doing pretty well with it! I have money invested and a healthy savings. It's freeing to feel financially stable!

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Kristyn link
4/23/2020 09:28:45 am

We did this for a bit! It helped a lot when we did.

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norma link
4/23/2020 01:04:33 pm

I have never heard of that technique but I love the way you included the pros and the cons to let everyone know that there is always a down side to everything.

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Cindy Ingalls link
4/23/2020 06:00:51 pm

I did this after I got divorced and it really help get my finances under control but now it's not really practical since I pay everything online.

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Tee link
4/24/2020 02:19:01 am

Money management is such a great skills. Great tips you shared, thanks
X
https://stwfblog.com/

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solrazo.com link
4/24/2020 04:22:31 am

I do this too. As for me, it doesn't matter if you lack a budget for the fund alloted on a certain envelope, so long as I'm able to manage the total budget allotment and do not use the envelope for the savings.

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Cindy Nico link
4/24/2020 08:26:58 pm

I did this system many years ago. It would be great for budgeting. With these times I have all my bills directly linked to be deducted monthly and that works for me.

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things to do link
6/25/2020 01:09:21 am

Keep up the good work; I read few posts on this website, including I consider that your blog is fascinating and has sets of the fantastic piece of information. Thanks for your valuable efforts

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