It was Sunday morning when I could not stay in bed after the dawn cracks. Finances had been at the back of my mind since my increment was put on hold, but I could not pluck up the courage to get a reality check. Finally, I pulled aside the sheets, rose to my feet and bolted every nook and cranny where I knew I could keep cash.
My trembling fingers reached out to my cellphone to open my bank app, and I found that I had already been in the red. My bills were due, my payday loan was yet to be paid off, and I had, of late, replaced a boiler of which instalments were yet to be cleared. All of a sudden, everything began to reel in front of my eyes. My brain got fogged, felt as if a myriad of threatening letters were finding their way in to drag me to the court.
This sort of situation can haunt anyone. Most of the borrowers find their budget collapsing to make payments, and as a result, they back away from adhering to the terms and conditions, which results in late payment fees and accrued interest. The debt continues to add up, and consequently, you fall into never-ending debt, the moment when the scenario of haunted letters and emails begins to make your life a nightmare.
Fortunately, this is not something you cannot deal with. The cash envelope system can come in handy.
What is the cash envelope system?
You create several envelopes based on different budgeting categories like food, travel, entertainment, etc. and allocate a fixed sum of money to each envelope based on the average monthly spending. The goal is that you will stick to the money you allotted to each envelope for a particular budgeting category. For instance, if you have pushed £300 for groceries, you cannot spend over £300 for groceries.
The envelope cash system helps build savings as you know how much amount to be spent on each of the categories like grocery, cosmetics, dining out and the like. This method can help you get your expenses in control, but you cannot use it for a very long time.
This method will let you know how much each category eats up your money. Trim down your expenses so you do not go beyond the set limit. This will prevent overspending, which is often the result of impulsive behaviour.
You know each category has capped on the amount you can use for it so that you will give a second thought to your purchase.
Who should use the cash envelope system?
Having said that, this method is suitable for those who want to achieve their savings goals by slashing expenses; it is crucial to find out if this will actually work to your advantage. The following questions can help you determine whether or not you should use this cash system.
- Do you oftentimes overspend?
- Do you want to take budgeting in your stride?
- Is your spending not in your control?
- Are you aware of where your money goes?
How to effectively use the cash envelope system?
Here is how you can extract benefits from this method:
- Determine how much you need to allocate
You should write down categories, and then you need to calculate the average spending on each of them. Review the bank statement for the previous six months. Jot down on a piece of paper and add in all figures to see if the total amount matches your total earnings.
Whether or not it goes beyond your monthly pay, you should consider where you can cut down. As the goal is to increase your savings, you will have to cut corners. Make sure you do not allocate too much or too little money to any of the categories because this will be problematic for you.
- Set limits
Do not forget to set the spending limit for each budgeting category. You should base your spending on your affordability, not on your willingness to spend. If you do it on the basis of previous spending, you cannot achieve your savings goals because you must have already been overspending.
This is why your budget was unable to help you get back in the saddle. If you find that you are unable to stick to the spending limit, you should start a side gig.
- Do not use your credit card
Make envelopes and then fill them with cash. There is no point in following this budgeting method if you use your debit or credit card. Make all your transactions in cash so you know how much you are left to spend on each category.
You should have an envelope for savings to fall back on during emergencies. However, you can use your credit card if you fall short of cash. Make sure you use it only when you are completely sure to pay off the balance on time. If you want to borrow money, use an easy loan approve lender who lends money at the most competitive interest rates.
Summing up
The cash envelope budgeting method can help you take control of your spending. Identify the categories and your spending criteria, then set the limit and track your expenses. Make sure you use cash for all your transactions. This budgeting method cannot solve long-term money problems.
