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The 'Envelope System' In a
Cashless Society
by Gary Foreman
My family has been trying to work with a budget for the past several
months, but the "envelope" system is just not practical with our
primarily cashless lifestyle. How can I track our cashless expenditures
for gas, groceries, personal items etc. and still know how much is left
in each category as the month goes on? ~ Lisa
Lisa's right. Some of the old budget tools don't work so well today.
Fewer of our purchases are made with cash. So merely controlling cash
isn't an effective budget tool.
Before we look specifically at Lisa's question, let's spend a moment to
talk about how budgets can be used.
A budget is a wonderful way of collecting information about your
finances and presenting it in a way that's useful to you. A simple
monthly budget can tell you at a glance where your money is going. When
compared to previous months it can tell you what's changing in your
spending patterns. That's important. Just knowing that your electric
bill is higher could help you identify an air conditioner that needs
servicing before it breaks down completely.
It's also a good way to find potential savings. If you need to reduce
spending by $250 a month, don't look in a category where you only spend
$300.
Lisa is attempting to use her budget for it's second purpose. A budget
can provide discipline and control over-spending.
There are variations, but in the basic envelope system Lisa would cash
her paycheck. She would have a number of envelopes for the different
categories of spending: rent, food, transportation and so on. Cash from
her paycheck would be divided into the various envelopes based on how
much she felt she needed in that category.
For instance, if she got paid weekly and expected to spend $40 per week
on groceries, $40 would go into the 'grocery' envelope. When she went to
the store she'd take the 'grocery' envelope with her and pay for her
purchases with the money in the envelope. If she got to the checkout and
had more than $40 worth of groceries in her cart she could return some
groceries or take some cash from another envelope. Of course, that meant
that she'd have less to spend on that category until the next payday.
The envelope system worked well when we used cash for all of our
purchases. You immediately knew if you could afford a purchase. Moving
money from one envelope to another was a warning sign that you could be
getting into trouble.
Unfortunately, very few of us use much cash anymore. We're much more
likely to pull out a credit/debit card or write a check. And an envelope
system doesn't handle credit cards very well.
One way to modify the envelope system is to add an additional envelope
for your checking account. When you charge something move cash to the
'checking account' envelope. If you charge $20 worth of groceries, move
$82 from the 'grocery' to 'checking account' envelope. Then when the
credit card bill comes you'll have the money available to pay the bill.
Or Lisa could use a 'pretend envelope' system. She would set it up just
as if she were going to use an envelope system. But she wouldn't
actually put cash into the envelopes. Instead on the front of the
envelope she'll list how much money is assigned to it. As she writes
checks or makes charges, she'd subtract that money from the balance
listed on the front of the envelope. When the running balance on the
front of the envelope got to zero she'd have to quit spending in that
category or 'move' money from another envelope.
Another way would be to use one or more sheets to keep a running balance
for each category. She could have one sheet represent each envelope. Or
she could have one sheet per month that contained the balances for all
of the envelopes. The sheets, or perhaps a small spiral notebook, could
be kept in her pocket or purse.
The danger in any virtual envelope plan is that you'll forget to make
the entry and your balance will appear bigger than it is. One way to
avoid that is to put any receipt into your pocket or purse. When you get
home you can deduct the expense from the proper envelope and place the
receipt inside.
There are also products that Lisa can buy that will help. One is
available at
budgetmap.com. They offer a specialized check register that allows
you to keep track of different budget categories.
Lisa is wise to recognize the limitations of any tool that she uses.
But, she's also smart to look for a system to help her keep her finances
in line.
About the author
Gary Foreman is a former financial planner who currently edits The
Dollar Stretcher website
www.TheDollarStretcher.com. If you'd like to same time or money,
visit today!
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