Friday, June 25, 2010
My Two Cents On Budgeting: The Envelope System
In the history of our marriage, we haven't used credit cards at all. Although I can see where a credit card could come in handy and I know that many people use them responsibly, our credit-card free approach has worked well for us.
As a single lady, I did have a credit card. Even though I was not a wild impulse spender, I spent an average of $100 more a month when charging purchases than when I paid with cash or writing a check. Those quick little trips add up!
I believe the reason for this was that I wasn't actually parting with money when using a credit card. Small purchases didn't seem like a big deal. After all, I could always pay the balance off when the bill came every month.
Before we were married, we were introduced to Dave Ramsey. His money managing tips were old-fashioned, simple common sense and easy to implement.
Don't spend more than you make.
We decided then to ditch the credit cards and live without them, committing to buy only what we had the money in hand for.
One method Dave highly recommends is the envelope system. I had heard about this from other financial gurus as well, so it wasn't a totally new concept for me. I hadn't implemented it before marriage, but it seemed like it would be a good fit for us.
What is the envelope system?
Designate one envelope for each spending category. Put the agreed upon amount of cash in each envelope.
When spending throughout the month or week or however your budget is set up, you use the money from the designated envelope. When the money is gone, it's gone.
My husband and I really like this method for four reasons:
1. Paying with cash forces us to think through our purchases instead of just throwing stuff into the shopping cart or making impulse online purchases.
2. We spend less when paying with cash than when using the debit card.
3. Since we have joint accounts, paying cash is easier to keep up with than both of us using the debit cards independently and possibly overdrafting.
4. The envelope system keeps us organized. We can tell at a glance exactly how much money we have for the rest of the pay period.
We use the cash envelope system for cash purchases. We pay our rent, phone bill, utilities, etc. by check or automatic bank draft, whichever is applicable.
Currently we use cash envelopes for:
--Play money (Fun money for both of us.)
--Eating out/ entertainment
--Thrifting/ yard sales
It's often helpful to have a category with "blow money" as extra if you need it. Also, clothing and gift money can be included in the envelopes as well. Look at your budget/ spending plan and designate envelope categories to how it fits into your life and where you spend your money.
We used to put clothing and Christmas money aside each month in our envelopes but found it was too easy to spend that money for something else if it came up. Therefore, when it came time to buy clothing and Christmas gifts, the money wasn't there. So we started putting those categories in savings instead and it has worked great! The money is there when we need it. Out of sight, out of mind. :-)
I'm boring so I just use Plain Jane envelopes in a plastic coupon organizer. Someday, I'd love to make or buy a cuter system. But for now this works.
Using envelopes does not embarrass me in the least. But then I guess I'm used to being weird. I don't know! I've found that my cash envelopes are often a conversation starter. "Do you do Dave Ramsey?" "How does this work for you?" "What categories do you use the envelopes for?"
Come to think of it, it's as much of a conversation starter as when I use my coupon binder in the grocery store. I'll share about all the Coupon 101 classes that take place in the pasta aisle another time!
I understand that this way of budgeting may not be an ideal fit for every family but it has certainly been very beneficial for us.
Let's talk! Do you use the envelope system? If so, what does and does not work for you? What categories do you have for your envelopes?
**Coming up next week: I'll be sharing a little about paying down debt. Hope you can join us!
**This post is a part of Frugal Fridays! Be sure to hop on over and read Jessica's great post on How To Live Without Credit Cards!