This is the next post in a series about our journey to being debt free...
At some point after graduation when we had real jobs and were facing a budget crisis we SORT OF tried the cash envelope system. It kind of worked but was frustrating and not fool proof and we soon gave up.
The problem was that we didn't have a good budget in place and so it was doomed to failure.
Really it's an age old system and has been around for a long time. Another signal that it's a good idea.
So here's how it works.
After you do your budget look at all the categories that aren't either bills paid online or auto drafts. So this will be your groceries, eating out, entertainment, date night, clothes, toiletries, car repair, gas etc.
On payday withdraw the total amount of cash for these categories and divide it into envelopes labeled with the category. You can use just regular white mailing envelopes or you can get one of the envelope systems from Dave Ramsey. (If you're crafty there's even ways to make your own and have some fun like here and here. Check out etsy.com and search "cash envelope system" for some really unique ones like this and this.)
The idea is NOT to use your debit card! Why? Numerous studies show that people spend 12-18% more when they use plastic (debit or credit) then when they use cash. Think about it. When you go to pay for your groceries what do you think is going to register with you more - laying down 4 $20 bills or just swiping your card. If you're spending $400 a month on groceries now (using plastic) and start paying cash that's about $60 you might be able to save.
It took us several months of adjusting both our budget and our envelope categories to get it right. We (and you may be different) have the following categories:
- Groceries (which includes toiletries, household cleaners, detergent etc since we buy most of it at Wal-Mart)
- Entertainment (eating out, movie rentals, going to the movies, date night etc)
- Gifts (birthdays)
- House (repair stuff, landscaping, bug spray, stuff like that)
- Misc (trust me, there is always a misc. that comes up - buying stamps,
- Fun Money (this is an agreed upon amount that Mark and I get monthly to spend any way we like)
- Kids Allowance (although it never stays in the envelope long - we pay monthly on the 1st)
You'll notice there's no envelope for gas. That is our exception to the rule and we use our debit card. Because, let's be honest, it's not like your going to SPLURGE on extra gas. Or buy a more expensive gas because you're using debit and not cash. Besides, what mom wants to drag all her kids out of the car to go inside and pay cash.
Now here's the kicker. When the money in your envelope is gone, it's GONE! What do you do if, 3 days before payday, you are out running errands and the 3-yr old is whining from the backseat and your too tired to even think about dinner and are contemplating the drive thru? You look in that entertainment envelope. If there's money you're in luck. If not, well suck it up and drive home (turn the music up to drown out the whining).
Now, theoretically you can borrow from another envelope if one has the surplus but beware lest you spend something you need before payday.
I will be totally honest and admit to you that we fall off the wagon REPEATEDLY. Like this summer? Total bust when it comes to the envelope system. And it's my fault as I'm the budget/cash manager. But I also know that when we are off the system, we are off the budget and nothing comes together like it should.
Be patient - it'll take you a few months to work out the kinks but I promise, if you use it, it will work. And, most likely, you'll be spending less which means more money to save or pay off debt. More on that next week!
(Here's some more tips on the envelope system from Dave.)
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