A (somewhat) simple money management system

Miscellaneous and Personal Stuff I Must Share
1

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

  1. Groceries
  2. Restaurants
  3. Entertainment
  4. Household
  5. 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.

2

Sounds like a good plan. We’ll give it a try, since we are in that boat with CC debt. We are opting out of this last rate increase and trying to go cash. thanks for posting!

3

I am fortunate in that I have eliminated all my debts, and my income is significantly higher than my expenses, so bookkeeping is a nonissue, but there is so much truth in that statement. I have helped several guys at work who were living from paycheck to paycheck begin to save money just by showing them how much money they were spending on completely frivolous items. It is worth it for everyone to keep a book for a month or two, writing down every single purchase(even a candy bar from a vending machine). When you see that you have been spending 25% of your after tax income on soda, cigarettes, fast food, etc, its a wake up call.

4

I’m always curious about people adding fun or convenience categories to their budgets. Restaurants and entertainment over household? If you’re already getting money for restaurants and entertainment, what do you spend your allowance on?

When I was killing my debt (knocked out $16k in 3 years), I really nailed myself to the floor. No restaurants, no entertainment. Eating out meant volunteering at the church so I could get a free lunch, or seeing what my parents had for dinner. Entertainment meant my friend bringing a movie over or taking my dog to the park. Groceries were cheap as I could muster, and I never bought non-consumables for the house.

Basically I denied myself an punished myself. After all, I was the one who ran up the debt. I wasn’t guiltless. And it wasn’t that bad because I had a goal. I knew I wasn’t going to live like that forever.

After the debt was gone and the burden was lifted, I immediately started accumulating money like crazy. Why? Because after three years I was still living like a miser. Yes, I did go out and buy the little stuff for the that I’d been longing for ($16 shower rack, new winter coat, orange juice, etc) but I also gained a new perspective on “need vs. want.” A lot of the stuff I thought I wanted back then it turns out I didn’t want or need, and I never bought it. Having money set aside was more fun.

Trying to get my friends to follow along with the savings plan called “denial” is challenging. No one wants to do it. No one sees the value in denying themselves a movie night or a $4 used CD. Maybe I’m just better at hating myself than most people. But now I really love myself because I’ve done something to be proud of!

Anyway, sorry to rain on your parade. Making a decision and a plan to get out of debt is a Good Thing, and sticking to it is even better. Hopefully you will see that the $2 you saved today, and tomorrow, and every day from denying yourself that restaurant visit will add up quickly and get you closer to your goal.

Good luck!!

5

Shocker Khan and I have been budgeting and on the cash envelope system for most of this past year and I can’t say enough good things about it and how much it has helped us. Before that, we were a mess - always getting overdrafts, charging on credit cards, and not paying our bills on time. It’s been a complete 180 and now not only are we able to pay everything we need to - we actually have money left over to save for other things. It’s amazing how hard you think about spending a buck or two when you’ve budgeted every last dollar.

6

You make a great point and, honestly, I wish we had your willpower. We do have “frivolous” items built into our budget. I think would go insane if we couldn’t at least have a little fun now and then. But restaurants, entertainment, and allowance total (off the top of my head) about 15% of the after-tax budget, which I don’t believe to be an ungodly sum.
Also the key thing here is that these are the LAST items you calculate into your budget. You don’t start with them, you rack your brain thinking of each and every monthly (and quarterly and annual) expense, figure out what you need to pay off your debts, and only then do you start in with what’s an appropriate amount to give towards “other” negotiable expenses.

We live pretty frugally and the great part of the envelope system is that it’s a perfect place to store the applicable coupons we clip so we also have those when going out shopping.

7

I’d add that another one of Dave Ramsey’s methods has helped me a lot in paying off credit cards–the payoff snowball. Budget the maximum amount of money you can put towards debt. Then pay the minimums on all your cards except the one with the smallest balance, and then put the rest into that one, irrespective of interest rates (obviously you have to use your discretion because I realize sometimes you have to pay off a certain promotional balance before the APR balloons to something ridiculous like 30% of the opening balance).

It’s not mathematically the best way to maximize your money, but seeing cards actually getting paid off and then being able to shred them just feels so liberating and motivates you to keep going.

8

The successful budget is not one that ignores the realities of your life, but budgets for them. There’s nothing wrong with eating out and having entertainment - you decide what is realistic for your plans, and budget for that amount (and stick to it). I’m frugal by nature and by nurture, but I’ll still spend money on “frivolous” things - this is your life you’re living. I didn’t used to want to waste any money on vacations, but a friend of mine made the excellent point that you don’t get this time back to do over, and you’re not getting any younger. We spend about $3000 per year on vacations now, and it has enriched our lives in ways I truly didn’t anticipate (plus we get to meet other Dopers - hi, guys! {waves}).