When we started on the Baby Steps all those years ago, one thing we resisted was switching to cash only. Our debit cards were so convenient, so easy. How could we give that up? Plus, when I had cash in my wallet, it had a tendency to disappear - a Coke here, lunch out there, a new shirt there, another Coke.... how could that be a better way?
I've been reading more and more lately about envelope systems, and people seem to be quite confused about what it is, how it works, and that it does work. At least I hope they're confused, otherwise why make such dumb comments?
Well, we toughed it out on debit cards for quite a while, and though we were able to monitor our spending quite closely, it was still just too easy to bust the budget and overspend - even by a little. The biggest problem was that you didn't know what you had left unless you went and did all the math before hand - which no one does. Mostly you'd end up doing it after the fact, just to find that you'd inadvertently overspent. Eventually we knew we had to do something different.
While listening to Dave one day, he was discussing the envelope system and how they did it. Initially they were strictly cash. But as they got better about their spending, they limited the cash to just a few categories. That made a lot of sense to us, and since we were not doing that bad on spending, we took the half-plunge. We tried cash on just a few categories and found it worked quite well. We still used debit for gas, still payed utilities online, but things like eating out, clothing, and spending money were all cash. And what a difference that made.
Sometime later, when we thought we had our spending down to a science, we went back to plastic. I think it was more laziness than anything. If we could succeed without that extra step of drawing cash out each month, then why not? Well, we couldn't. Cash was just a better way, for certain categories. Before going over just how we do our envelopes, I'll give a quick framework for the envelope system:
- We are done with debt - we don't need it, and that includes credit cards.
- Debit cards, while not incurring debt, can still enable overspending, which is the root of the problem at hand.
- Sticking a wad of cash in your wallet does not constitute "switching to cash". That's like embarking on a cross-country trip with no map or directions. You are set up to fail, maybe not catastrophically, but you're not in a position to win. This is about behavior change - you can't go about your day the way you used to and get the same result.
- This can be done, even when there is more than one of you doing some of the spending, but it will take time to find the right formula for you.
So knowing all of that, here is the system that we have laid out and currently use.
- Budget - It all starts here. What are we spending this month and where? If we are traveling, then the restaurant category will be a bit higher, and groceries a bit lower. If you have your budgeting down, then envelopes should go smooth.
- Cash - What will we need cash for? For us, we do groceries, restaurants, home improvement, and clothing as well as baby sitter money, and petty cash as needed. We chose these as they are the easiest to overspend on, or ones that we just need cash for - the babysitter doesn't have a card swipe!
- Withdrawal - Once that paycheck hits, the Mrs. makes a withdrawal and sorts the cash into their envelopes. These days, she's using a small accordion file, that keeps it all neatly organized.
- Distribute - One she has the cash, I get my allotment. Since she does the grocery shopping, and most of the shopping in general, I don't carry much cash.... since I don't need much cash. I usually just have a bit of cash for a couple lunches out. I only carry what I'll need. Money we won't need that day stays at home.
- Spending - Cash envelopes are sometimes seen as being more difficult, but that is due to overlooking their simplicity. It's easy to know what you have left, in any category, at any time with no guesswork, no reconciling, no fancy software. Open the envelope and count. That is what you have left. When it's gone, it's gone. When you have extra, reward yourself.
It's really not tough, and only serves to increase discipline as opposed to plastic, which has nothing to do with discipline. But it's only as good as your budget, so make sure you get that working right. Sure we still use our debit cards for things like gas, hair cuts, vet bills, and on-line shopping. Those are places where we don't tend to overspend, and using cash would really have no benefit. Utility bills, medical bills, insurance premiums, and the mortgage are either paid online or with a check.
Last, the most absurd objection to using cash is that it's "a burden to carry cash" / "too dangerous and I could get mugged". Seriously? Some cheese with that whine? How on Earth is cash difficult? If having a plan, budgeting, and not shopping on a whim is a burden, then yes, guilty as charged. And dangerous? If you're going to get mugged, then you are going to get mugged - no matter what is in your wallet. Maybe worry more about not making yourself a target? Nobody said you have to carry all of the cash all of the time either. You know when you are going grocery shopping. Otherwise, don't take the grocery envelope. Now stop making excuses, and take control!
Have you ever tried cash envelopes? With or without a plan?
How are your envelopes set up?
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