Several years ago, a coworker recommended Microsoft Money to me. MS Money is a popular personal finance program for the PC. I loved it, so I wrote a post called “Why I Love Money.” For what it does, I still like it better than its competition, but I no longer use it. My approach to managing personal finances has evolved, and I no longer find Money all that helpful. I found a system that works much better for me.
Promoting MS Money, I wrote,
On its start page it even tells me with a bar chart how close I am to reaching my preset monthly spending limit when it comes to groceries, dining out, and miscellaneous costs.
That is what excited me most: keeping within my budget’s boundaries. If I did that, my perfectly planned budget would work. So I liked that MS Money kept me informed as I reached my predefined limit.
The problem was that my wife had the checkbook, and I had the debit card. She didn’t know (or care) about what my computer program said, and I didn’t know what checks she was writing.
In the evenings, I would update our spending in Money. Every penny I spent, I categorized. It didn’t matter how big or small, I was going to track it. As we had different schedules, I didn’t always dig into my wife’s purse for the check book to see what she spent, so I would track it when it eventually cleared the bank. Sometimes she spent more than what was in my perfect budget, and I had already swiped the card for milk or bread or other small items. The theory behind my system was good, but it didn’t come without costly complications. Dang those overdraft fees — dang them to heck!
On top of that, I would spend $30 to $40 every year on the latest version of MS Money to ensure that I had the latest bells and whistles.
In the long run, it just didn’t work out for me.
Enter Dave Ramsey
Last year, a different coworker introduced me to the writings of Dave Ramsey (pictured above when I attended his Dallas conference last month), a personal finance expert. His brilliant yet stunningly old-fashioned tips and financial philosophies have revolutionized my money management. His book Total Money Makeover was most influential.
I highly recommend the book — and I could write one of my own to explain all I have learned since then — but I want to share with you the one concept that has meant a world of difference to my family’s finances: The Cash Envelope System.
Wal-Mart and Entertainment Envelopes
This simple concept has saved us a tremendous amount of money. I have of course devised the perfect budget for us, but it takes an envelope to actually execute it. Each time I get paid, I cash out the amount my wife and I agreed to spend at Wal-Mart, which is nearly synonymous with “groceries” (though it includes other household items). I place this cash in an envelope that I pick up at my bank’s ATM machine, and I label it “Wal-Mart $.”
I take another predetermined amount of cash and place it in an envelope labeled “Entertainment.”
It’s amazing how this one practice has improved our finances. Never is there a bounced check, never is there an overdraft fee, never is there any miscommunication. When there is no more money in the Wal-Mart envelope, we stop spending at Wal-Mart. It’s that simple. It doesn’t even require me to be at my computer to look at a bar graph! And I don’t have to remind my wife how much is left in our grocery budget. She can see for herself what’s left in the envelope.
When we go out to eat or see a movie or play, we don’t feel guilty. We enjoy it more, because we don’t worry about whether we’re taking away from our other financial obligations. We included it in our budget. And when the envelope is empty, no more fun till the next paycheck. That helps us to be more responsible with our fun.
This saves money on checks, which are expensive. (I pay all my monthly bills online — without checks.) Spending cash, which seems archaic these days, also keeps us from overspending. It’s hard to spend cash out of an envelope, because you feel like you’re spending. You have a stash of money one moment, and then you see it being depleted the next. It’s more visual and therefore more painful than swiping a card and typing onto a keypad. So we don’t spend as impulsively.
This has been the most helpful (and cheapest) tool that has made the most difference to us.
“Envelope” Check Register Spreadsheet
The second most helpful tool has been this free, downloadable spreadsheet I found at the “It’s Your Money” Web site. I use this instead of Microsoft Money or Intuit’s Quicken. It’s like having virtual envelopes, following the same principle as my real envelopes. Get the spreadsheet here.
The idea is to give a name to every dollar of your paycheck before you get it. On pay day, I simply enter into the spreadsheet how much money I’m allocating to each category in my budget. When the sum of these amounts equals the total amount of my paycheck, I stop. This method insures that every dollar has a purpose. Anything I spend on food or fun during the week comes out of our cash envelopes, and I feel no need to track every penny or document precisely what was spent and when (thereby saving a lot of time). I only open the spreadsheet on pay days, when I pay the bills for that pay period. And when I pay bills, or spend anything else online, it must come from one of these categories that I set up. So I always know what we can and can’t afford. I know that even though I may have a “large” amount of money in the checking account, every dollar already has a purpose. I don’t freak out if I have to buy a couple new tires for the car, because I have an “auto expenses” category that’s just waiting for me. It’s all on the spreadsheet.
I love it, hence this post, “Why I Love Money Even More In Envelopes.”
Filed under: finances