What is the Envelope System Budget (AKA “Cash Stuffing”)?
While some of the root principles are useful, the Envelope System Budget (also known as the Cash System Budget) is making a comeback thanks to the TikTok trend called “Cash Stuffing.”
Before I dive into the pros and cons of this budgeting strategy, lets look at a quick overview.
How it works
The Envelope System, or “Cash Stuffing,” is a budget strategy in which you allocate your cash to specific categories by placing them into labeled envelopes.
I’d recommend taking this process digital and using a spreadsheet over physical cash, but choose what works best for you and your family.
The first step is to take a look at your spending habits. I'd recommend reviewing the past few months to get a sense of your categories.
The cash system works best looking at your household's net income, which is what you bring home each month after taxes and deductions.
Example of The Envelope System
Let's say your household brings home $4,500 monthly.
Step 1, cash that check and make it rain or roll around in it - how you spend your time is up to you.
Step 2, set up your categories. It could look like this:
Mortgage
Daycare
Emergency Fund
Bills
Credit card/loan payments
Groceries
Eating Out / Entertainment
Miscellaneous
Investments / Retirement
After your categories are set, start placing cash in each section until all of your cash is used.
If you aren't sure how much to dedicate to each category, I'd highly consider the 50/30/20 approach, where you place 50% of your money towards necessities (ex. rent), 30% towards wants (ex. vacations), and 20% to paying down debt and investing (ex. Roth IRA).
Every family has a different financial situation - figure out what works best for your family unit.
I would highly recommend including an emergency fund and a miscellaneous category. Both of these categories will help you with any unforeseen events, and as we all know, there are plenty of unforeseen events when you have kids.
If you have any cash left over at the end of the month, congrats!
This means you are under budget and can roll it into next month, or splurge and go out for Sunday brunch.
It's important to enjoy even small victories, but don't go overboard. If you have some spare cash, consider putting off a nice meal and investing it instead.
Your time and money are precious, put your money to work so that you can gain financial independence and build generational wealth.
Pros of the Envelope System
There are a few positives to the cash system budget.
First, it's a great tool to help teach your children about basic budgeting techniques. Give them a few extra chores around the house and help them learn how to save and spend. It'll serve them well as they get older.
The cash system is also useful for individuals who are more visible or may not trust themselves to stick to a budget without physically seeing the cash they spend.
It's better to stick with the cash system budget than not budget at all, just know that it can be risky to walk around with all your money in your pocket. This may not be an issue if you live in a relatively safe area, but you can never be too sure.
Downsides to the Envelope System:
Let's start with the obvious. You are walking around with all of the cash from your paycheck. What could happen you ask? Theft, fire, or a gust of wind to name a few.
Granted, it's recommended that you keep your cash in a safe place and only take what you need with you, but you get the point.
In today's modern society, there's no need to rely on physical cash to pay your bills. Plus who wants to carry around loose change on top of everything else?
Using cash also takes time - a lot of companies won't accept an envelope of cash to pay your bill and it takes way too much time to check out at the grocery store.
Shopping online is much easier and faster. I thought I was busy before, but after becoming a parent, I realized how much time matters.
Don’t Miss Out On Credit Card Perks
Another downside to using the cash system is that you miss out on all those credit card perks.
Credit cards are a great way to earn cash or points, providing rewards on purchases you were already planning to make. We earn hundreds of dollars per year in cash back by using our credit cards.
My wife and I only use cash or debit cards in an emergency or if credit cards aren't accepted, which is rare.
Use technology to your advantage
Embrace technology in your life as much as possible. Shopping for groceries online allows you to know exactly how much you will be spending before you hit purchase, and most retailers offer free pickup.
Automate your bills so you can spend more time with family and friends. Or use that extra time to pursue a side hustle so you can retire faster.
