The Envelope System: Year 2

We went a whole year on the envelope system in 2009. We saved a lot of money, managed to take a great trip and save for another one, and have a lot of fun, and by the end of the year met our goal of being able to live on just Mr. B's salary. We're geared up (and excited) to continue the budget into 2010. We reevaluated the envelopes this year - eliminated one, cut the funds to some others (Example: The personal fund got chopped in half. We weren't buying $100 worth of shampoo, deodorant and haircuts each month), and added an additional $200 that used to be allotted to spending to our monthly savings transfers.

I got a lot of emails throughout the year asking about our envelope system, and I thought I'd address some of the most frequently asked questions here.

Q. Do you really keep all this cash around your house or do you just make sure you stay in your budget while shopping with credit and debit cards?
A. My mom and aunt would like me to make it very clear that we don't keep loads of cash laying around our house. We pull out only what we need for the spending envelopes every month and keep our savings funds securely tucked away in various bank accounts. BUT - this budget does not work without a cash-only spending system. It's much easier to add a few extra Target items and grocery store goodies to the cart when you're aimlessly charging than when you're forking over a set amount of cash. Mr. B (the grocery shopper) has had times where he takes $40 to the grocery store and tells the checker to stop if he goes over that amount. We're hardcore about the budget.

Q. What do you have against credit cards?
Nothing and everything. B and I got lucky and both have the same philosophy on credit cards - you treat them as cash, pay them off every month and don't buy things if you can't pay for them. As a result, we don't deal with credit card debt, we don't pay interest on purchases, and we get some rewards back for what we do buy.

But, there's not a hard and fast stopping point for spending with credit cards (unless you hit your credit limit). There's less accountability for sticking to your budget. B and I tried budgets while still charging everything (we wanted that 1% back!!!), and they didn't work. With cash, there's a hard stop. Out of money in a category? Out of luck. The amount we saved spending cash only was over $1000 a month - and I can promise you that's a hell of a lot more than we were getting back at 1%.

We still charge things - bills paid online, gasoline, etc. We like to keep our credit fresh, but for everyday, fluctuating purchases, we pay cash. I'm pro credit card - having credit in our names helped us qualify for great mortgage rates - I'm just more pro-savings.

Q. I spend cash whenever I get it from the bank, so how does this help you save money?
A. I did too. But when the cash in your wallet is all you're allowed to spend, you spend it much more frugally. It helps, too, that we don't keep the cash in our wallets. We each get a monthly spending allowance, and beyond that the money is secured in an envelope file system. If we need something at the grocery store, we go home to get the grocery money before we go. It's the only way it works for us.

Q. How did you figure out your budget?
A. This strict budget all started after I lost my job in 2008. We had never worried too much about money because we paid our bills on time, but realized we could both reel in our spending. So I looked at our credit card statements for two months to get an idea of what we spent where. Everything was tallied - gas and other car expenses, groceries, toiletries, pet spending. And from there I had a rough idea of what we spent and where we could cut our spending to meet our number one goal: Live on one income and save the other. So, I assigned a number to each category, and we took out the cash we needed to get started. And within 15 days, we knew this was the budget for us.

Q. So, what is your budget?
A. We have three budget categories:
1) Set Bills We Pay Directly (monthly or annually)
Mortgage
Car payment
Utilities
Cell Phones
Car insurance

2) Monthly Cash Spending
Groceries
Eating Out
Gasoline (paid via credit card)
Casco
Clothing
Gifts
Personal (includes toiletries, haircuts, athletic fees)
Individual Monthly Spending

3) Savings
We've chosen to break this up into long-term savings, short-term savings, retirement savings, vacation savings, etc. We have separate, linked accounts for each of these that we make a monthly deposit into with every paycheck.


Q. Do you still have fun?
A. Oh, yes. Our social life has not taken a hit - which amazed me at first, but makes sense. We think before going out to eat more often, but the budget hasn't stopped us from doing something we want to do. If we have a big event coming up - a birthday or an anniversary, we might choose not to eat out the rest of the month so we can use all of our restaurant money on a nice night, but making those choices is kind of fun!

So, that's a little round-up of our first year on a cash-only budget. We know it's not the system for everyone, but we're thrilled with the results we've had. Anyone embarking on a new budget for their New Year's Resolutions? Any other questions? I love to talk budgets!