Another simple way to budget is the cash/envelope method. If you examine your spending habits you will likely find that much of your spending is fixed. You can’t do a lot immediately about your mortgage or rent, car payment, or basic utilities. To quickly gain control of your budget your discretionary spending is usually the best place to start. To implement the cash/envelope method examine your monthly spending and identify spending categories over which you:
- Have some discretion; and you
- Spend more than you should.
Although it is different for everyone some common categories that fit this description are:
- Eating out
- Clothing, and
Write the name of each of these categories on an envelope (banks will usually give you cash sized envelopes for free). Then, for each of these categories set a realistic budget covering some time period (weekly, bi-weekly, monthly) and get the cash out of the bank to fill the envelopes. The cash has to last you for the pre-determined time period. When the money is gone, you are done spending for that category. You can decide whether to allow yourself to take from one envelope for spending in another category or not.
This method can be used by itself or in combination with some of the other budgeting methods we will discuss. It is simple, easy to implement, and it provides instant feedback on how you are doing.
We have already discussed the need to keep score, and how keeping score leads to improved performance. One of the “Four Disciplines of Execution” taught by Franklin Covey is the need for a Compelling Scoreboard. The reason the cash/envelope method works so well is because cash is an incredibly compelling scoreboard. We are emotionally attached to our cash, and it is hard to give it away.
Spending with credit and debit cards, on the other hand, is easy to dismiss. Studies have shown that we tend to spend more when we buy with plastic than we do when we use cash. This is true even with debit cards. When we use plastic we don’t feel the pain of spending like we do with cash. If cash is a compelling scoreboard, plastic is an easily ignored one.
I am all for the use of technology to help us control our personal finances. There are tools available today that make the job easier and more fun than it has ever been before. However, when it comes to controlling our spending a return to the use of good old-fashioned cash might be the best method.