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.