money management

Photo by Fransesca Pageo

We use cash for most of our day-to-day purchases.  A lot of this has to do with where we’re currently living - not as much is online, and not many mom-n-pop stores here take plastic - but even stateside, we rely a lot more on cash than on plastic.  I’m not here to debate the security issues of using a debit card versus cold hard cash (maybe I’ll dip a toe in that water one day), but overall, I can positively say that using old-fashioned cash with the tried-and-true envelope system for everyday purchases works well for us.

The Benefits of Cash

• You can’t spend money you don’t have. Many bank accounts provide overdraft protection, so even with a debit card, it’s easier to go over your account balance than you think.

• You’re more aware of what you’re spending - if you’re using an envelope system, that is.  Yes, it’s unbelievably easy to let cash slip through your fingers when you’re not paying attention to it.  It can be slightly easier to keep track of purchases with a bank statement.  But if you’re willing to keep a daily record of what you’re spending, it’s not hard to keep track of cash at all - and you save money in the process.

• It hurts more to spend cash, so you don’t spend as much. I’ve heard Dave Ramsey say this before, and I think it’s true - it’s a bit numbing to swipe your card at the store.  But it’s more painful to pull out a wad of 20-dollar bills to pay for those jeans.  You’re more likely to think through your purchases, and therefore, not spend money where you just don’t need to.

An Envelope System, Simplified

Here’s how we create our envelope system.

(Note: my husband receives his salary just once monthly, so we have a pretty cut-and-dry monthly budget.  If you get paid every two weeks, it would probably be easier to create a workable system where you fill and spend envelopes according to your paycheck.  In other words, work with your cash flow, not with a system that you think you should have.)

1.  About a week before the new month, we create our next month’s budget (we use Pear Budget).

2.  When our salary hits our account (and we can predict down to the hour when the money will appear), we act immediately.  Basically, on payday, one of my household management tasks is our bank accounts.

3.  I look at our monthly budget, and total how many of those categories we’ll spend in cash.  That’s how much money we need to withdraw from our bank.

4.  I leave a couple hundred in the account to serve as padding for bank and bill mistakes (and for us, we also need padding for fluctuating exchange rates).  I also make sure to leave enough money for our online bills and expenses.  But then, I go ahead and withdraw enough cash to fill our envelopes, right then and there.

We fill our envelopes with the cash needed for each of these categories (which we figured out when we did our monthly budget).  When the cash runs out, that’s it for that category.

Photo by velo_city

Keeping Track of it All

Let’s say I need to hit up the grocery store for my regular weekly trip.  I take a generous amount of cash from the grocery envelope (though not all of it), put it in my wallet, and head to the store.  If I’m not replenishing an enormous amount of groceries, I keep a general till in my head as I shop; otherwise, I pencil in a rough amount on my grocery list.  I usually round up, to be safe.  The reason I don’t put the exact amount down to the cent is because I’m rather an idiot at math - I keep it simple so that I can total it up in my head.

Because I’ve kept track of my grocery selections, I’m confident of my estimated total as I head to the register.  I pay in cash, and I immediately label the receipt “groceries” before putting it in my wallet.

When I get home, I empty my receipts and put them in our designated spot near the front door. As I mentioned in my ebook, we have a landing spot for things like keys, sunglasses, and shoes by the front door.  Well, we also have a receipt dump.

Once a week, I take all our receipts, which are (hopefully) all labeled with our expense categories.  I then enter them in to our Pear Budget account, complete with appropriate tags to keep track of our categories.  And of course, I also enter our online expenses and income, too.

Spending Money

You might remember when I described how we create our zero-based budget that we specifically have categories designated as free spending money.  It’s not much, but both my husband and I each get a set amount each month to spend on whatever - coffee is usually my purchase of choice.  We put this money directly in our wallets, and we make sure to keep that separate when we have money from another envelope. When our spending money is gone, it’s gone until the next month.

A Few Answers to Predictable Questions

Q: Are they real envelopes?

Pretty much.  They’re plastic zippered pencil pouches, and we keep all of them together in a basket on our desk.  They’re labeled with each of our categories:

• groceries - this includes anything we’d get at the grocery store, such as toiletries
• household - this is different from one month to the next, but it includes things like a new bath mat, or a printer cartridge, perhaps
• public transportation - metro, bus, and taxi fares (it’d be the equivalent of gas for those of you with cars)
• dining out & family fun - restaurants, movie rentals, perhaps a fun treat for the kids, like a trip to the zoo

Photo by no feeling

Q: Do you carry around a ton of cash?

No.  We leave our cash at home, and take it with us when we’re purposely going out to spend the money.  Yes, there are times when we’re out that we need to make an unexpected purchase - but it’s not often.  An envelope system curbs our impulse purchasing power, which is one of the real benefits.  But when it does happen, we either use cash from another category, then adjust accordingly when we get home; or we use our debit card, and label the receipt with that category name immediately before putting it into our wallet.

Q:  What about unexpected things?

Real life happens, of course, and there might be times when we need more grocery or transportation money than we thought.  In that case, we juggle money around from the other envelopes.  It’s good to stay flexible, but the money has to come from somewhere.  As much as I’d like it, my superpower is not making money magically appear, and our family doesn’t use credit cards.  It’s only logical that if we need more grocery cash, then we either need to make more money, or take it from another category.

Q:  What if you spend money on more than one category at the same store?

I don’t split hairs over it - I just spend cash for one purchase, then make a note on the receipt of what was from a different category.  For instance, if I bought household supplies at Target, and while I was there I bought a DVD for our family, I simply tick the DVD on the receipt as “family fun,” and enter that separately on our budget record.  I’m hoping that Pear Budget will soon be able to split receipts into multiple categories, like the painfully overloaded Quicken.

I know that in this digital age, spending cash is almost considered a faux pas.  That’s okay with me, though - we spend less money when we do, and that’s more important.  We’ve never lost the money, and since the envelopes are only for a few spending categories, it’s not as much money around our house as you might think.

Thanks to ING Direct’s incredible ability to create umpteen jillion accounts for free, we pretty much use the envelope system for our online purchases as well.  The system is called sinking funds, and we have individual online savings accounts, all with ING, labeled things like Christmas, clothing, and giving.  As we spend money online from our checking account, we simply transfer the exact funds from the appropriate savings account.  It’s beautifully simple, really.

Do you use cash for anything anymore?  If so, do you use an envelope system to keep track of it?  What’s worked for you? I’d love to hear.

Photo by Brandon

The following is a guest post from Miranda Marquit. She edits information on debt consolidation for DestroyDebt.com and writes for YieldingWealth.com.

Every where we turn, there are “special offers” and “bargains” that save us money. But sometimes, these are just gimmicks designed to help us spend more. Here are some ways that you may actually be spending more, even though you are supposed to be “saving” money:

1. Credit card and financing deals

“0% financing for 12 months!” is a common refrain, as is “Pay nothing until 1010!” However, when you buy something on this premise, planning to pay it off, the store wins. Most people actually don’t pay off their purchases before interest is charged. And in the case of the “no payment” deal, the interest is usually capitalized and added to the principal when it is time to start making payments.

Another problem with buying things on credit (besides the interest charges) is that you have a skewed idea of how much you spent. Study after study shows that people spend more money when they shop with credit - and they have a harder time remembering how much they spent.

2. Big superstores

The idea behind the superstore is “one stop shopping.” Additionally, it’s supposed to have a plethora of items at lower prices. However, many of us spend more money when they shop at these superstores. A few items are priced lower, but most of them are just as expensive as elsewhere. And people tend to buy more at a superstore, as well as buy impulsively. Comparison shopping for sales and using coupons often don’t enter the equation, either. You’ll buy less - spending less overall - if you make a list of the best prices at two or three stores, and plan your shopping trip in advance.

3. Free shipping

Many web sites offer free shipping when you spend a certain amount of money online. So, in order to save $5.97 in shipping costs, you make an unplanned purchase of $10.64. Your “free shipping” actually cost you $4.67.

This principle applies to other similar ploys. The “buy two, get one” sale and other gimmicks are designed to have you spend more money than if you stuck to your original plan to just buy one. It looks like a bargain, but you are really spending more than you planned - on something you probably do not even need.

Before you part with your family’s hard-earned money, it’s important to research whether you’ll really save money. Any “bargain” that requires a purchase of items you don’t need or want, or hadn’t planned on buying in the first place, isn’t really a money saver.

Agree? Disagree? What’s been your experience with these marketing tactics? If you avoid these kinds of strategies, I’d love to hear how else you “work the system” to save money.