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The Envelope System: Can Paying With Cash Really Help Reduce Debt?

When you’re using your credit or debit card for all of your purchases, it’s easy to overspend. You might have a set budget, but there’s nothing in place to physically stop you from going over your limit.

Cash feels more real and tangible than the swipe or tap of a card. It feels more painful to spend it—and when it’s out of your wallet, it’s gone. You know automatically when to stop spending, because you literally can’t spend any more.

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There’s a specific system that’s built on the psychological impact and physical limitations of spending with cash. Finance bloggers like Dave Ramsey, the Budget Mom, and Natalie Bacon recommend it, among others.

It's called the envelope system, and here’s how it works.

Make a budget

Figure out how much money you have every month for various expenditures—groceries, gas, clothing, entertainment, eating out, and anything else you spend money on. Identify which ones you regularly go over-budget on.

Some of your bills—such as your electricity bill or your student loan payment—you probably have to pay through direct debit or other methods. They don't need to be included in the exercise. But anything you can pay with cash needs to be accounted for.

Make an envelope for each expenditure—and fill them with cash

Make an envelope for each item you spend money on—clothes, groceries, drinks with friends, and anything else you tend to overspend on. You can even have some fun with this—lots of people make an art project out of this, or buy fancy envelopes from Etsy.

When you get your paycheck, take out as much cash as you’ve budgeted for the week for each expenditure. Divide your cash between envelopes—so if you’ve budgeted $200 for groceries that week and $50 for drinks with friends, put those amounts in the corresponding envelopes.

You can put money in your envelopes for weekly or monthly spending. Either one works, but it can be easier to apportion your spending if you take out money on a weekly basis—so you can’t take money from the next week’s budgeted amount to overspend this week.

See also: Paying Off Student Loans

Take your envelopes shopping

When you go shopping or go out with friends, take along your envelope for that activity. Spend only the cash in your envelope—and stop when you spend it all.

The key is not to fall back on your credit or debit card—that defeats the purpose. If you’re grocery shopping and your bill goes $5 over, then it's bye-bye to the Double Stuf OREOs.

Real die-hards leave their credit cards at home. That’s a great way to enforce your budget, but bear in mind that you might need a credit card for emergencies.

The envelope system works because it forces you to be intentional. You get a really obvious cue to stop spending—once you’re out of cash, you’re done. And if your purchase costs more than you budgeted for, you have to put things back.

Looking for other ways to be strategic with your money? See more articles about Financial Freedom.


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