Managing money that you cannot see (as it is in the bank) is a difficult concept for many people. These people tend to have an inflated idea of how much money they actually have, and they tend to overspend and begin to rely on an unreasonable amount of credit to live.
The best way to teach a person to manage money is to have them actually handle the money. The Cash Envelope System is an excellent way to have people come to terms with their incoming and outgoing expenses.
Home budgeting using a Cash Envelope System has been around for decades, but it has been left by the wayside in favor of more modern means of cash management.
It has recently made popular again by Dave Ramsey, an American financial writer and radio and television show host. He currently has a self-titled program called the Dave Ramsey Show on the Fox Business Network. His very popular Financial Peace money management program is used in churches and organizations all over the country to help struggling families make sense of their budget.
How The Cash Envelope System Works
The Cash Envelope System is quite simple. You basically have en envelope fore each category where you need to spend money. These categories include line items like food, gasoline and oil, car repairs, clothing, laundry, toiletries, cosmetics, entertainment, misc, etc.
At each payday, you would put a designated amount of money in each envelope according to your budget. You can only spend the money in that envelope for the purpose written on the front.
You may notice that I included car repairs in this list even though car repairs are not a monthly expense. However, car repairs are often unexpected. Therefore, it helps to have an envelope full of cash to get your vehicle repaired when the time comes.
I have been a certified tightwad striving for financial freedom since I became pregnant with my first child — and I decided to find a way to stay home with him full-time. I enjoy sharing my personal experiences in my journey back to financial health and planning for a future — which will include sending 2 kids to college and early retirement.