Tuesday, September 24, 2013

Budgeting: The envelope method


Dave Ramsey, the man is famous and wealthy for giving common sense financial advice! Don't get me wrong, I love Dave Ramsey, he realizes where most peoples weaknesses and pitfalls are and outlines strategies to overcome their financial bad habits. One of the strategies he suggests to keep people on track with their budgets is the use of cold hard cash divvied up into envelopes.

To say the envelope method is "the Ramsey method" or give him credit for the idea would be off base. I know older folks who have never heard of Dave Ramsey who did this. Ramsey however did make the concept more popular or widespread. While Dave Ramsey's books are ultimately mostly common sense apparently that is something most of us are lacking when it comes to our finances. I aspire to be a financial adviser, and its not so I can tell people all about complicated sophisticated products that they can't understand, its so I can help them reach goals that seemed unattainable or a distant dream like becoming debt free, becoming a home owner, paying off a mortgage, car loan, student loan, developing a budget, and yes investing for the future! It was actually one of Dave Ramsey's books that made me aspire to become a personal financial consultant and made me more passionate about finance.

The Envelope Method

  • Develop a budget
  • Label envelops based on budget e.g groceries, gas, rent
  • Put the amount budgeted for each category in the corresponding envelop
  • Spend ONLY whats in the envelop for each category
Pretty simple, right? As in so simple it shouldn't need explanation... =)

The envelop method works great for two reasons. It is very easy to overspend just sliding a debit/credit card, the money is more of an invisible number. The main reason this method works so well is you can tell how much you have spent and how much you have remaining by whats in the envelop, you can't accidentally overspend when your using cash, once it is gone, its gone!

You can get your whole family involved in the envelop method, explain it to your children, let them have a say in how the "family fun" money is used. Give them individual clothing envelops and watch them develop into savvy shoppers! In researching for this article I found a fun way to be creative with your envelops that can be fun for your family. Blogger Amy Bayliss wrote an article about how to get creative to make some really unique really beautiful spending envelops (pictured). You can link to her blog here: http://amybayliss.com/2011/08/how-to-make-pretty-envelopes-for-the-envelope-system/

I know first hand how the envelop method works as I used it when I was a server. Since I was paid in cash and lived with my then boyfriend I just paid my share of the bills to him and cash and paid my mom to buy my car (which used to be hers). I paid all of my obligations early and in full using the envelop method and was never short or never spent more than I could afford to... that is the beauty of using cash, no overdraft fee's, no over drafting period! Using the envelop method also insured I didn't blow my money or overspend in one category, it allowed me to pay my mom off really soon while meeting my other obligations. 

The reason I chose to write about this today is because after I quit serving and starting college and no longer had a cash based income I diverted from the envelop method. I hate driving anywhere, let alone to the bank to withdraw money for envelops, however I am paying for it. This month we are OVER budget, no we don't have insufficient funds, bounced checks, or a negative balance, however we also won't be able to meet our savings goal this month! We are hoping to buy a house soon, and we are also going on a trip so saving is important! 
Next month I am back on the envelop method. Spending just doesn't seem as real or as big of a deal when your just sliding a card and dealing with numbers on a screen, it just seems like its play, some video game. Cash in my hand, yeah, I'm not as willing to part with it! I will do an update post to let you all know how on track I am for my budget next month.

FYI: This month I was overbudget mainly due to sending money to a relative who had just moved to a new city and had everything they owned stolen (someone hotwired and stole the whole uhaul). I am more than okay with sacrificing some savings to help family! Other than that I admit my husband and I did make some purchases we should have waited on. I bought clothes this month, then a steam cleaner since his dog is having accidents, he bought who knows what LOL! This was not my ideal month but no one is perfect and its the first month since I have made the budget that I will not be meeting ALL of my savings goals.