Tuesday, October 8, 2013

Budgeting Basics: The Envelope System

I'm guessing in almost every couple there is a saver and a spender. But my husband and I like to do things together - so when we're saving together it's great - but when we're spending together, watch out budget! Somehow having the other person there with you makes it seem like it's ok to cross that budget line. And it's always big stuff - like vacations! Of course now we have a vacation "envelope." Back in the olden days of our lives we would just go on vacation and figure out how to pay for it when we got home. We were very spontaneous with our weekend getaways, making memories and leaving a trail of debt along the way. Eventually we received a wake-up call. It doesn't take more then your credit card being declined at the grocery store to put things in perspective. We had to start living within our budget. 

My husband read Dave Ramsey's book Total Money Makeover. The first thing he tells you to do is write down your monthly income then list all your expenses. "Give every dollar a name," he says. When you first do it you may find out you're living beyond your means. For most people it's a fancy car with a payment that crushes their budget. For others it's a love of shopping. For us it was a little of everything, but mostly it was lack of any sort of budget. As soon as we started tracking our dollars, we wanted to be able to control our dollars. We used the "envelope" system. You literally put cash in an envelope that is labeled with that Dollar's name. For instance, "Food."  Clothing, entertainment, gifts, kid's activities - anything you spend money on over the month gets an envelope. The vacation envelope is important to us. It's not essessial to most, but to us it means time together, time with the kids, time away from all our work worries. If we have to cut back on spending in another envelope in order to go on vacation we will. We consider it a priority. When I pull up to my daughter's school in my 2002 mini van that looks like the ugly duckling next to some of the other parents' cars picking up their kids, I remind myself that driving it means I get to go on vacation,  and that makes me smile. 

But recently I had to go back to basics with my clothing budget. I had been using the YNAB app (You Need A Budget) which is great, don't get me wrong, especially for more complex budgets, but I was putting clothes on credit cards instead of taking the cash out of the envelope, which allowed me to overspend one month, taking me into the negative for the next month. I went over the last two months. Perhaps it was my Back to School shopping Saga at Justice or my shopping spree at Goodwill when everything was 50% off. I always say that the occupational hazard of working at Old Navy is the temptation to buy! Either way, I went over. So now I have to put the clothing cash in the envelope. And you know, now that it's cash, I don't want to spend it! There's something about it being cash that makes me almost afraid to spend it. I know when it's gone it's gone. That's why Dave Ramsey is so anti credit card. He knows that people will spend more if they have a credit card then if they're paying cash.  So if I want something at the end of the month or if Old Navy has a big sale, I know I want to have that money to spend. I think this is part of the beauty of the system. Half the battle of budgeting is mental. Getting yourself to curb your spending and ask yourself: "do I really need this?" I've listened to Dave's podcasts and heard him argue with someone about them using a credit card to earn points ( or miles, or whatever). His main point is that when you don't have to pay for it right away, you are tempted to just buy it, and figure out how to pay for it later, leaving a trail of debt along the way. And I don't want to go back to that trail ever again!

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