I’ve seen a lot of threads on here lately about credit cards, credit card debt, and handling finances. I thought I’d share our system that we’ve implemented in our household that’s really working well.
First, some background. We have a lot of credit card debt. Thousands and thousands of dollars. It’s our own fault and for awhile we ignored it as best as humanly possible. Surprisingly that didn’t work so well.
We finally got our act together, transferred the debt to an insanely low APR (with a low transfer fee to boot) that’s allowing us to convert a good portion of our monthly income into knocking down the capital rather than just pay interest.
Then I went to working on our monthly budget. At first I tried a website I’d heard of called Mint.com. It’s a neat little site that allows you to track everything going in and going out of all your accounts and group them based upon spending categories so you can really see where your money is going. That worked for awhile but the principle flaw in that system is that it doesn’t stop you from spending…you just get to see where it all goes! And boy, when you see little $2 purchases add up to real money, you know it’s time for a change.
So some friends of ours recommended a system based upon Dave Ramsey’s advice. In essence, it’s really quite simple: take out the money you need and spend only that money. I was quite skeptical at first but it really does work well for us and I’m going to show you how we’ve implemented it.
First, go back to the monthly budget. I created a spreadsheet that shows all our income in and then categorizes the money going out. Then, I created categories of
- Allowance. Yes, it’s just the two of us. Allowance for the adults.
Categories 1,2 and 3 gets taken out of the bank weekly and put in separate envelopes in the house. Category 4 and 5 are bi-weekly. Allowance is yours and gets to be spent however you like. Lunch out? Hookers and blow. whatever. We’ve also found that merging 2 and 3 works on occassion.
Now, this takes dedication. You need a) an accurate accounting of monthly income and debits to determine the money needed in each category. b) the foresight to go to the bank every week. c) to remember to bring the necessary envelope with you when going out with you so you have cash on you.
But when you do all that, staying within budget isn’t just simple, it’s impossible to not accomplish. And if you don’t spend all the money in an envelope during the week, guess what? You get to treat yourself the next week. Or you can see your money grow as you work towards a goal of, say, eating out at a really nice restaurant.
And if you’ve spent all your money in an envelope? Yeah, you’re screwed. Guess you should have planned better when you went out grocery shopping. You’re eating PB&J for two nights.
But what you really see, if you follow this system, is that you cut out about 90% of your credit card purchases (feeling guilty about those other 10%), and you have a truly honest accounting system that you can see. Cash in envelope means you have money! No cash in envelope? No spending.
Give it a try. See what you think.