The Envelope System - Budgeting Series 3

Using cold-hard cash to budget!

The Envelope System - Budgeting Series 3
Photo by Jason Leung / Unsplash

Hint: You use cash

I decided to write this one after the automated budget because, in our 21st-century world, there are some things you will have to buy online. I would encourage you to read that article first because many of the same principles will be used in the cold hard cash budget.

Now, why do we work in cold, hard cash? The biggest reason is because some people are just tactile. They need to feel, touch, and taste. Not that I would recommend for you to eat your money literally. Especially when you start your budgeting journey, sometimes just feeling and seeing this cold, hard cash teaches you better than numbers in a bank account. It is also psychological. It is shown that some people when they actually part with money, psychologically feel it based on a study done by Drazen Prelec and Duncan Simester, professors at Massachusetts Institute of Technology. Yes, you don't get all the sexy credit card points. But at least based on research, you may be spending more to offset those awards. So, how do we manage cash? well, I will use something I didn't originally come up with the "Envelope System"

Envelope System

Growing up listening to Dave Ramsey and taking Financial Peace University, I learned a lot about the envelope system. This and sinking funds really opened my mind to how one should manage their money. It is crazy simple, but therein lies its beauty. You just take cash and distribute it in envelopes. Of course, I will give you more specifics.

The exception expenses are fixed expenses, the emergency fund,  and investing should follow what we covered in the automated budget. At the paycheck level, everything goes into those three accounts. We will use the envelope system for your other savings categories and spending.

For everything that isn't fixed expenses, the emergency fund, or investing you will send to a checking account that no money comes out except for the money you withdraw from the bank in cash. You then pull all the money out (leave a little buffer just in case), take it, and distribute it into envelopes. Each envelope represents a savings category and a spending category. Much like anything else, you can have as many as you want.  

In Conclusion

This cash-based system is probably the simplest to follow. Combined with the automated budget, some aspects can help simplify your spending. 


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Updated 1/9/24