How to use the cash system to control your budget


    The transshipment system is a great way to save money.

    It works by allocating money in envelopes for specific categories like eating out, shopping, movies, etc. Once you’ve spent the money in the envelope, it’s for the month. You can no longer spend.

    It’s a great system to use, though you have debtsbecause it forces you to be aware of your expenses – but is that all it is supposed to be?

    Let’s break down exactly how the envelope system works, why it is good, and some of the disadvantages of using it.

    What is the cash envelope method?

    The cash handling system is a simple means of controlling your spending. Each month you have a set number of envelopes, each one dedicated to a specific type of expense. You allocate a set amount of money to each envelope and that is the money you will need to spend on that expense for that month. Examples of expenses can be:

    • Housing (rent, ancillary costs, etc.)
    • Groceries (grocery store purchases, takeout, eat out, etc.)
    • Entertainment (streaming video subscriptions, books, etc.)
    • Student Loans
    • savings

    While the traditional envelope system uses physical envelopes and real cash, there are more modern approaches. Tools like Mvelopes bring the handling system online, follow the same principle but allow you to track your expenses digitally. This can be helpful because many types of expenses – from Uber trips to student loan payments – cannot be paid for in cash.

    What are the benefits of cash stuffing?

    You may also see the envelope method called cash stuffing or cash envelope stuffing – but it’s all the same. Either way, this approach has some clear advantages that can make it easier to set and stick to a bulletproof budget. With this strategic method, you can:

    • Sit and achieve clear savings goals and achieve it effectively through conscious, regular contributions to your goal. By proactively allocating a set amount of money towards your goal each month, you avoid spending your money elsewhere and running out of money.
    • Avoid impulsive spending. Once you have used up the money in a given envelope, it is for the month. You should wait until the next month (in theory) to get more. For people who have a tendency to spend impulsively (and then feel the buyer’s remorse), this can be a way to improve their buying habits.
    • Take a hands-on approach to money management. This approach makes money management and spending a tangible process. If you go for the long-standing method of using physical envelopes, every time you reach into an envelope you become very conscious of every dollar you spend.
    • Become more disciplined in your use of money. By requiring you to consciously plan and think about how you will spend your money, cash stuffing teaches discipline. Ultimately, it can help you gain better control over your finances and remove the fear associated with money when you feel like your finances are getting out of hand.

    The strength of the cash system lies in its psychology. It doesn’t require you to leave out the things you love entirely – like your morning latte. By allocating envelopes for both necessities (like rent) and fun things (like entertainment), you can practice spending consciously: you are spending for your money – things you cherish and enjoy – instead of denying yourself all joys.

    How to start the cash handling system

    Another benefit of the cash handling system is that it is easy to implement. You don’t have to tinker with complex Excel spreadsheets or pay for expensive software to get started. You can start cash stuffing with your next monthly budget. This is how you prepare for success.

    Create a budget or conscious spending plan

    Before you start filling envelopes, you need a clear budget. According to the conscious spending model, your budget should cover the bare essentials and the «extras» that you do not need, but should improve your quality of life. Your total budget can be divided into four buckets:

    • Fixed costs such as rent, utilities, groceries, insurance, health care, debt settlement, and transportation
    • Investments like funds, stocks and bonds
    • savings like cash or retirement plans like a 401 (k) or Roth IRA
    • Guilt-free spending on the «wishes» that make everyday life great, such as your Netflix subscription or luxury items that you love

    After you’ve sketched out your budget, you can set up a budgeting system – in this case, the envelope method. If this is your first time budgeting, check out this simple beginner’s guide. Even if you don’t stick to cash stuffing in the long term, a clear budget planner will help you with all of your money management.

    Create expense categories

    Use the conscious spending model to create expense categories within your budget. Let’s assume you have your “savings” bucket. You can further break this down into three categories, e.g. B. Saving for an emergency fund, saving for special occasions like birthdays and holidays, and saving for a specific destination like a car. Each of these secondary budget categories will later receive its own envelope.

    Set appropriate spending limits for each category

    Now that you’ve created your conscious spending plan and defined your spending categories, you can answer the big question: how much are you going to allocate to each category? In some cases this is dictated by external factors. For example, your fixed costs like rent and car payments are non-negotiable.

    Two popular budgeting approaches to splitting expenses are the 50/20/30 and 70/20/10 rules. The 50/20/30 principle means that 50% of after-tax income is used for needs, 20% for savings and debt, and 30% for the rest. The 70/20/10 rule means that 70% is used for spending, 20% for savings, and 10% for donations.

    However, these are not hard and fast rules and you are free to set your own guidelines. The point is to cover all four areas of spending (fixed costs, investments, savings, and debt-free purchases) and then set an appropriate limit for each category (as well as the secondary envelope categories within that category). Each individual’s budget is unique.

    Fill your envelopes of money

    Now for the fun part: cash stuffing! If your old school you will need envelopes, something to write on, and cash. This poses a drawback to the method: you have to go to the ATM to withdraw cash for your envelopes. However, as mentioned, the success of this method requires the tangible removal of the money from the bags. It’s a psychological trick that will make you fully appreciate every dollar you spend.

    Alternatively, you can use a tech tool like Mvelope to digitally allocate enough money to your various virtual wallets. This can come in handy, especially with expenses paid online. Some modern budget apps can also be linked to your bank account credit or debit card to automatically track expenses. However, these extras can detract from the psychological potency of the original envelope method.

    Carry over cash to the next month or adjust expenses

    The first time you set up the envelope method, you create a budget that will leave you at zero at the end of the month – which means every dollar allocated to your four buckets should be spent. As the month progresses, you can have cash left over at the end of the month. For example, you may have canceled your never used Amazon Prime subscription, joined a coupon program to save money on groceries, or paid off your car.

    When this happens, it’s time to adjust your budget and the allocation of money to your envelopes. You can either adjust your spending – for example by investing more in the debt free category – or carry your money over into the next month. This can help create a useful buffer for the future.

    Take control of your financial future

    A cash envelope budget is one of the many tools that you can use to improve your money management and meet your financial goals. With its psychological effects, it’s a great way to avoid over-spending, which can be great for those struggling to save money (or living from one payday to the next).

    This approach is also about giving you more freedom of choice about your money, demystifying budgeting and simply breaking it down. It also enables conscious spending and ensures that you don’t have to deny yourself your favorite pleasures. Ultimately, this will fuel the mindset you need to lead your rich life. Learn more about how it works with our six-week program found in the book I Will Teach You To Be Rich.

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