Wednesday, August 18, 2010

The Easiest Way to Stay Within Budget

Every so often, someone asks me how we stay within budget. My answer is always the same.


Whatever I can put on automatic payment, I do: mortgage, utilities, insurance. But when it comes to haircuts and groceries: cash. Sticking within your allotment is not a complicated thing, but you have to be willing to try something different than what you have been doing.

With cash, there is no end-of-month marathon to reconcile checkbook and bank account. I used to spend a couple hours at the end of the month going through the bank statement to add up everything that fell under "groceries" or under "gasoline" to see if we stayed within budget. Now, at the BEGINNING of the month, I pull out cash from the bank, mark it on our budget, and divvy up he bills among categorized envelopes.

See? At the end of the month, I don't have to do anything with the online bank statement except make sure the automatic payments went through and that there are no unauthorized charges. This takes about 10 minutes to do.

When it comes to using cash, the hardest thing is to get people past their excuses for NOT using it.

"I'm afraid I will lose the money!"
I'm a girl who constantly loses her keys and wallet. Ask my husband. I'm on my third set of house and car keys, and I've replaced my driver's license twice. I've been using the cash system for a few years and have lost my cash exactly zero times. How is that possible? Simply, I do not carry the cash with me at all times! Most of the time, the money is sitting at home in a drawer. I carry it with me only when I am going to the store or the hair salon and then I bring it back home.

I don't go jogging with it. I don't take it to the gym. I don't take it to church. I don't take it to the park. The reason why people lose their sunglasses/keys/ID is because they tend to carry these things everywhere.

"I get rewards from my credit card."
Not as many as your credit card gets from you. There have been studies done demonstrating that consumers spend 12-18% more when paying with plastic than with cash. I have also come to similar conclusion from my personal experience. Even with the debit card, I found myself many times at the end of the month exclaiming, "Oh my gosh! I can't believe how much I spent on groceries!"

People with this excuse to not use cash think they have found a financially sophisticated way to beat the system. Trust me, the credit card companies are not dumb enough to give away more money than they get you to spend.

"Yeah, but we keep track of our debit/credit purchases on paper, so we know how much we're spending."
With plastic, even if you are tracking your purchases, you are less likely to put something back once you're at the register if your total goes over your allotment. Likely, you will just say, "Oh well, it's only $XX more."

I came across this excerpt from an old "Ensign" article. Notice that this is before the common usage of debit cards. One might think that checks are an even safer form of payment as it usually involves keeping pretty close tabs on your running balance via the checkbook register.
"One solution: Use checks only to pay bills that you send through the mail. For all other purchases, use cash. Or don’t use a checking account at all; pay bills with cashier’s checks or money orders. This is the norm in many countries. In Japan, for instance, personal checks are rare. Perhaps this is one reason the Japanese have one of the lowest levels of consumer debt and one of the highest levels of personal savings in the world. Using cash prevents bounced checks and service charges. It also keeps you from spending more than you have." (Jack M. Lyon, “‘How Many Loaves Have Ye?’,” Ensign, Dec 1989, 36; emphasis added.)

"It's too complicated."
Not so much. Try it. Use cash. When you run out, don't buy any more.

Once in a while, I hear someone say that they have used the cash system in the past, but it didn't work for them. What I usually discover in talking with them is they jumped right into carrying a dozen envelopes to pay for every possible category. I recommend starting out on the cash system with ONE envelope. I suggest that one envelope be the "Groceries" category since it's the category in which most people easily overspend. Use cash for just that. Do it for three months. You will be surprised how much money you save each month! I usually end up with money left over, and obviously, I never go over the budget for that category.

If you are one of those rare persons who tracks what they spend AND puts stuff back at the checkout when they hit their budget allotment AND never carries a balance on their card, stick with what is working. But consider the cash system. When you visually see money leaving your hand, you may find you actually spend a lot less than you used to and end up creating your own cash-back reward.


  1. i love the envelope system. it has definitely been an eye opener. i love this blog!

  2. I love that Steve Martin skit so much!!!