About Cash Envelope Budgeting Systems
Managing a household budget can be a challenge. One of the simplest and oldest budgeting systems uses nothing more than a handful of envelopes, but is generally acknowledged to be one of the most effective budgeting tools that you can use. Here is everything you need to know about this method for organizing your finances.
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Function
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The purpose of a cash envelope budgeting system is to help you manage your household money. In its simplest form, you decide how much money you can spend each week and put that amount of cash into an envelope. Whenever you make a purchase during the week, you take the money out of the envelope. You can only spend the money that is in the envelope. When the cash is gone, you can't spend any more money.
Types
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There are a number of variations that you can add to a simple, basic cash budgeting system to customize it for your use. Most common types of cash envelope budgeting systems use multiple envelopes. Instead of putting all of your money into one envelope, you divide it up according to categories of spending. If your budget allots money to groceries, clothing, entertainment and transportation, you'd use four envelopes--one for each category. Put the amount of money allotted for each expense into a separate envelope. When you spend money for that purpose, take it from the correct envelope. When you run out of money in that envelope, you have no more money to spend for that category until the next paycheck.
A cash envelope budgeting system can help encourage saving in two ways. First, you can start by setting aside savings when you divide up your cash for the week into the budget envelopes. Then at the end of the week, take any money that is left in all of the envelopes and add it to your savings.
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Effects
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A cash envelope budgeting system helps instill good spending habits. Because you are actually handling cash money, psychologists say, there's an emotional "twinge" at parting with the cash. More to the point, you can easily see exactly how much money you have left to spend in each spending category when you use a cash envelope budgeting system.
Considerations
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A cash envelope budgeting system is a handy way to teach children about the value of money. Children and teens who use cash envelope budgets get an appreciation for spending money within a budget and saving money.
In addition, a cash envelope budget system can be extended to help you track household expenses and maintain accurate records for tax time. Simply make a note on the envelope every time that you spend money to keep a running tally of the envelope's balance. Put all receipts for cash spent into the envelope. At the end of the month, put the envelope of receipts aside so that you'll have them available when it's time to do your taxes. You'll have everything you need at your fingertips.
Warning
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The biggest danger to a cash envelope budgeting system is the temptation to move cash from one envelope to another, or to add cash when you run out. This temptation is especially strong when you first start using a cash envelope system. It will take a few months to get adjusted to spending within a budget, but sticking to it is an important exercise in disciplined spending.
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Resources
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