So you want to start budgeting and saving, but you are unsure where to start? One of the most effective ways to start setting money aside for a rainy day or to pay down debt is to apply the envelope method, otherwise known as cash stuffing.
Cash stuffing is a system used to visualize your budget and keep you on track in maintaining that budget. The premise of this system is to use multiple envelopes that are individually labeled and categorized among all your household expenses. Using cash in your budget is a proven method to help curb your spending and examine where your money is going. While this is a challenging first step to incorporating a system to manage your finances better, it has many benefits.
How Does Cash Stuffing Differ From A Savings Account?
Using cash is a more practical option when you are trying to limit your spending. You can always use your savings account to save money, but when you swipe for a purchase, you don't visualize the loss until you've reviewed your bank statement, making you vulnerable to overspending. With limited cash on hand, you are naturally much more cognizant of where that money is going and become more diligent in your spending. A study conducted by the Journal of Consumer Research concluded that when you use cash for your everyday purchases, you are less likely to overspend, particularly on impulse food products. There are benefits to using a bank card, such as for point accumulating, but in this case, using cash is the more suitable choice.
The better understand how to start cash stuffing and it’s benefits, we created this comprehensive guide. So let's jump right in.
1. Organize Yourself
One of the most significant determinants of succeeding in anything in life is being organized. Without being well organized, you are bound to fail at whatever it is you're doing. Being organized keeps you focused and can help you envision your success. It also reduces the stress and chaos of clutter, which is something you don't need, particularly when it comes to your finances. This is key in cash stuffing because misplacing your envelope can happen easily; you can misuse budgeted funds or allocate funds in the wrong envelope. Find a designated place in your home that is safe and out of view from others. In addition, you might want to use a container or a safe(if you have one) to ensure they are always together and organized.
2. Create Budget Categories
This will be among the more manageable steps because all that is required is for you to create a list of expense categories, that you presumably already have stored mentally. Create a budgeting journal containing main categories and within those lists, include subcategories because they will go on to have their designated cash envelopes. Remember, the purpose of cash stuffing is to divide all your household expenses and give them all strict budgets designed to prevent overspending. Furthermore, organizing your budget planner into categories will help you visualize exactly where your money is going and how much of your earned income should be reserved for all these expenses.
According to Mint, a personal finance management app, roughly 65% of Americans do not know how much money they spend the month prior. Having a cash stuffing system can undoubtedly help Americans better track and manage their money.
To help you out, we created a comprehensive list of categories you may want to consider adding to your budget list.
- Housing (Mortgage/Rent, Property Taxes, Household Repairs, HOA Fees, Utilities, Food/Groceries.)
- Transportation(Vehicle Payment and Insurance, Gas, Repairs)
- Medical/Health Care
- Miscellaneous/Personal (Clothing, Gifts, Entertainment.)
- Debt
- Travel/Vacation
Now that you have this worked out, you should have an idea of how many envelopes you need.
3. Create Individual Budgets
Cash stuffing doesn't only require managing one budget; instead, you want to create a uniquely personalized budget for each category to get the most out of it.
So let's use housing as an example. You have a subcategory for mortgage/rent, which is a fixed monthly expense, so determining your budget for this will be relatively easy. Suppose you get paid from your employer bi-weekly, and your monthly mortgage or rent payment is $850. You will set aside $425 and store it in your envelope labeled mortgage/rent. On your subsequent payday, you will do the same thing. Take $425 and securely store it in the envelope, topping it up to $850.
Keep in mind, this method of saving is utilized to save for future bills, not your current monthly bills. Suppose you just topped off your mortgage envelope with $850 from September's salary; you will use this for October payment.
Now let's touch on a variable expense such as utilities or groceries. We know that these expenses fluctuate from month to month, so the most effective way to budget is to take the average amount and allocate that amount. Suppose you're accustomed to paying an average monthly bill of $280 for your utilities; set aside $140 for two consecutive paychecks to cover this expense. A little trick is to budget for a lesser amount that you know is feasible and attainable; therefore, encouraging yourself to save on that specific monthly expense.
The same concept would apply to a monthly grocery expense. Determine how much on average you spend and go with that amount. Try to decide against a large grocery budget because this expense tends to be one of the categories Americans overspend in. As of 2019, the average American overspent on groceries by $7,400 annually. Consider what you can do with this money if you cut down on your grocery bills. Paying down bills and saving for retirement would be excellent choices.
4. Review and Analyze Your Income
A significant step in budgeting for cash stuffing is knowing home much you earn vs. how much you pay in expenses. Suppose you've completed your monthly budget, and your monthly total for all expenses is $2280.
Your next step is to calculate if your net income can cover your expense and, if so, how much is left over at the end of each month. This is an essential step because, in many cases, people don't realize they make less than what they earn, and they're living off extended credit.
If you did the math and calculated that your net take-home pay is $1880 each month, that implies you are in a $400 deficit each month and relying on credit to get by.
In this case, revisit the drawing board and review each budget category, particularly your monthly variable expenses. Whichever variable expense you have that can be reduced or an expense you can do without, it would be sensible for you to make that adjustment. You can't save money when you're living in a financial deficit; it's simply not possible. Creating an expense tracker is an excellent way to visualize your finances and keep you motivated, so make sure you have one built into your budget.
5. Never Overspend
As mentioned above the entire premise of cash stuffing is to pay down debt and save for the future. If you determined in your budget planner that what you set aside in your envelope is sufficient to get you through the month, you should not resort to your bank or credit card, in the event you spent it all and need more. Overspending invalidates the entire purpose, prevents you from reaching your goal, and hinders your potential to change your spending habits.
Keep in mind that as of 2021, over half of Americans have less than $250 of disposable income, which means if an emergency were to arise, they would struggle to pay for it.
Financial commitment can ensure you are not part of this statistic so do your best to stay on track.
6. Practice Saving
Suppose you have a surplus of cash in various categories each month; this is an excellent thing! You don't need to spend every dollar you set aside.
If you begin saving cash month after month, you might want to create another envelope labeled "savings" if you don't already have one. Alternatively, you can add this money to your debt payment envelope to expedite your debt journey. In addition, you can use these savings for a rainy day or emergency fund. If you haven't already, calculate 3-6 months of expenses (which should be quick since you already created a monthly budget). Accumulate the surplus of savings until you have a safety net of cash saved. This is very important because it will prevent you from breaking your budget if an emergency happens in the future.
7. Readjust Your Budget When Necessary
Life changes, and so do our expenses. Suppose you moved into a new cheaper apartment and your rent/mortgage was reduced by $200; naturally, you will make this adjustment in your budgeting journal. Allocate this added savings to your debt reduction plan or savings plan. Whichever option you use, utilize it for your financial future.
On the contrary, suppose your rent or mortgage increases by $200. Go ahead and make the adjustment in your budgeting journal. In these types of scenarios, you should then make adjustments to other categories to offset the increased expense. If you notice some categories consistently have a cash surplus each month, you may want to allocate that surplus into your new mortgage/rent envelope. Try not to tap into your savings to cover added costs. Regularly making these necessary adjustments is an excellent way to make this cash-only diet work in your favor, helping you reach the financial freedom you desire.
