The Cash Envelope SystemA lot of debt free frugal people promote the cash envelope system. Basically, you go to the bank (weird, I know), take out cash (remember those little green pieces of paper?), and distribute it into envelopes representing each budget category.
You carry these around and use them to pay for expenses like groceries, clothing, gas, and entertainment throughout the month.
The obvious drawbacks are that you could be carrying around a sizable amount of cash at any given time, and not everyone is comfortable with that. It also takes some coordination as to which spouse has which envelope at any given time.
The advantage is that if you run out of cash, you cannot buy anything else. It makes it really hard to go over budget.
Studies have also shown that people who use cash tend to spend less than those that use a debit or credit card. There's just something more painful about seeing those dollars leave your hand.
Digital "Envelope" Budget SystemsLuckily, there are a couple of completely free and awesome digital "envelope" systems that work very well if you're not ready to part with your debit or credit card just yet.
Here's the caveat. If you have ever carried credit card debt, do the Dave and cut them up! Get some little white envelopes and get yourself to the bank. You need to be dealing in cash.
I say this without any judgement. It's just that, if you want to take control of your finances (and I really hope you do) you need to break the cycle of relying on consumer debt. And a real cash envelope system is the one no-fail way to do that.
For my family, our debt is of the student loan variety. That doesn't make it any better, but it does make it a little easier to manage. We graduated seven years ago (gulp, where did the time go?) and there's not much of a chance good old FAFSA is going to be sending any more loans our way.
As a result, there are a couple of reasons we've decided to stick with using plastic on a day to day basis.
1. Tracking ExpensesKnowing where your money going on a daily or weekly basis is essential to staying on budget. If you only look at your spending at the end of the month, by then it will be too late to change the course of your spending. You'll already be over budget!
For us, using a digital envelope system makes it easy to consistently track our expenses. (We personally use mint.com but I also like mvelopes.com.) If my husband forgets to bring home a receipt, no big deal, it's already automatically logged on our Mint account before he gets home.
If I were trying to keep up with these on paper or on a desktop spreadsheet, it just wouldn't happen. (Let's be honest: we tried that before. I guarantee it doesn't work.) It might work for a while, but then life happens and we get busy or sick or tired and that little spreadsheet quickly gets forgotten. Before you know it, months have gone by and no one knows where the time or the money has gone.
2. Credit Card PointsWe've kept the credit cards for the points. I'm fairly comfortable with this scenario because I pay it off anytime I log in to pay a bill, which is several times a month. (Ok, I stopped typing and did it just now just to prove the point.) This means that we rarely have a balance over $300.
Ironically, the credit card points we are accumulating are helping us get out of debt. We convert the points on our main credit card to cash every month (typically around $30) and use it to pay off our debt.
I know this is not a recommended practice with most of the debt free set. So I would say use it with extreme caution. Know yourself and your financial situation. Be a big girl (or boy) and do what you know you should.
3. Full Financial Picture
We also like using plastic with a digital envelope system because it allows us to add all of our accounts to get a full (and automated) financial picture. With Mint or Mvelopes, you can see your transactions and balances for credit cards, checking, savings, loans, even paypal the moment they happen. Mvelopes.com allows you to manage up to 4 accounts for free. Mint seems to be unlimited.
You can log into one account and see everything that's going on with your money. I don't know about you, but at this point in life, I need things to be extra stupid easy or I'm not going to deal with it. If I had to log into every one of those individual accounts, find the log in names and passwords, probably type it in wrong twice, it's just not going to happen.
I'm all about keeping it simple, and the digital envelope deal is simple. Once you get your account set up, every transaction is automatically categorized. (You can change it if the software guesses wrong, and it learns your preferences over time. You can also split transactions into different categories if necessary.)
You can enter all your budget categories and amounts. It shows you exactly how much you've spent and how much you have left in each category. The little bar turns green when you're on budget, yellow when you're about to meet your budget, and red if you go over. My two year old could understand it, which let's be honest, is about the mental capacity I'm operating at these days.
4. Alert, Alert!
There are about a million different alerts you can have sent to your email, text, or mobile device to update you on your financial situation and alert you if there is any unusual (aka irresponsible) spending or if you are about to go over budget.
This is a great fail safe to keep you on track with your budget. Like a hungry toddler, your finances will not allow you to ignore them for long. Sure you can choose to over-spend anyway, but you will no longer be doing so in blissful ignorance.
That's about it. If you are sick of going over budget every single month. You need to get started on some kind of envelope system. Put the kids in front of the TV (oh ya I just said that!), sit down with your spouse for half an hour, and get started today. Do not let another month go by without taking control of your budget!