Picking the right cash envelope categories for your envelope system is key for budgeting success. Check out this step-by-step guide to choosing the best categories, or simply skip ahead to the top five recommended cash envelope budget categories.
To successfully budget and spend with the cash envelope system, you need to select the right budget categories for your envelopes.
If you choose too many budget categories, your purse is huge and you’re shuffling through envelopes every time you want to make a purchase.
If you choose the wrong budget categories for your cash envelopes, you won’t see any improvements to your budget.
If you don’t know which categories to choose, and just never start this system, then you are delaying your path to financial success. And that’s just silly.
Below I have described a process that will help you identify the best envelope categories for your budget. However, if you are in a rush, or just want to get the ball rolling, scroll down and I list my top five recommended categories for beginners.
Step-by-Step Guide to determine the best budget categories for the cash envelope system:
1. Whip out your budget
And oh my, if you say you don’t have one, quickly print out a budget over here.
2. Cross off all of the fixed budget categories
Cross off all of the fixed categories on your budget because they are not good candidates for cash envelopes. Fixed expenses don’t change from month to month; they remain constant. Fixed budget categories typically include rent/mortgage, cable/internet, subscriptions, memberships, daycare, health insurance, car payment, debt payment, etc.
You are never going to be tempted to spend more money on your cable/internet. You are never going to impulse buy more rent (that just doesn’t make sense). Having cash envelopes for fixed expenses won’t help; it won’t you spend less on fixed expenses (they are fixed, after all).
3. Circle all of your “problem” categories
All of the budget categories that are left should be your variable expenses. These expenses change from month to month depending upon what you want and need that particular month.
“Problem” categories are the budget categories that you know you tend to overspend. They are probably the categories that you feel most guilty about, or the categories that you feel are out of your control.
You might feel guilty about how much money you spend on clothes – make that a cash envelope. You might feel like your grocery spending is out of control – make that a cash envelope. If you are anything like me, you can go a little crazy with restaurant spending – make that a cash envelope.
If you are unsure of which categories to pick, here are a few suggestions:
- Go over your last three months of budgets and identify all the categories you went over-budget on. These are your problem areas!
- Ask your spouse. They probably know your spending problems just as well as you do.
- If all else fails, scroll down for my recommended five budget envelope categories for those just starting the cash envelope method.
5. Whittle down the list to your top problem areas
Select your top 5-7 problem areas. These are the areas you struggle with the most.
If your list is long, prioritize your list starting with your biggest headache, most over-budget category. From your prioritized list, choose the top 5-7.
6. Reassess next month to see if you need to change your budget categories
You probably won’t get it right the first time, and that’s okay. Adjust your budget categories and adjust the number of envelopes until you have a system that works for you.
Top questions about budget envelope categories:
Should I keep my large sinking funds in cash envelopes?
I personally do not recommend having envelopes for your large sinking funds like car maintenance, vacation, or school tuition. These sinking funds can be thousands of dollars and you don’t use this money on a monthly basis.
However, if you think that you may spend the money allotted to those sinking funds instead of saving that money each month, then a cash envelope may be the best choice. You can keep the envelope at home in a lock box or safe space.
How many envelopes should I have?
I recommend 5-7 cash envelopes.
If you have more than 7, then your cash envelope system becomes an organizational nightmare.
If you have less than 5, then you may not be including all of your “problem” categories/expenses in your system. However, there are certainly people out there that only need a couple cash envelopes, it’s just not the majority of budgeters.
If you are just starting out, I suggest starting with five cash envelopes. That is a manageable amount for beginners and likely allow envelopes for your most critical “problem” categories.
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What type of budget categories? Fixed or variable?
Your cash envelopes should only be used for variable expenses. Variable expenses are expenses that vary from month to month. You don’t know exactly how much you are going to spend in that budget category each month (but you can guess based on your spending history).
Recommended cash envelope categories for beginners
If you are still stuck after following the guide above, I suggest starting with these five cash envelope categories:
- Personal Care / Beauty
- “Blow” money
- Household goods
Choosing envelope categories
Ultimately you are the one that knows which cash envelope categories are best for your situation. There may be some trial and error if you are just starting to use the cash envelope system, and that’s okay. Keep on testing and trying until you find what works for you.
Remember, you have to develop a money management system tailored to you. Make a system that is easy to follow, but also a system that makes it hard to over-spend.
What budget categories did you choose for your cash envelopes, and why?