How to replace cash envelopes, and when not to

This morning as I was trying to dodge commercials and morning-show call-in games, I heard a couple of DJs talking about personal finance, and how their finances are a mess, and they heard that in the old days, people budgeted by putting money in cash envelopes, paid expenses out of those envelopes.

They asked if anyone has a high-tech way of doing the same thing.

You probably could do something similar to that using Quicken, or perhaps your bank’s online banking. But I just use a regular old srpeadsheet for budgeting. That’s how I’ve always budgeted. I list monthly income in one column and my expenses in another column, using additional columns to annotate. Then, in yet another column, I have a simple equation: the sum of income minus the sum of expenses. That way I can see very easily if I’m in the red or not.

This allows me to track expenses that get paid automatically, or by means other than cash.

But for some expenses, we literally use an envelope system. Especially groceries. When you walk into the grocery store with a list and two $20 bills in hand, it really cuts down on the impulse purchases that bust the budget.

We do one other thing too. My wife and I each get $100 a month that we can spend however we want. Sometimes we talk about how we’re going to spend that, but we don’t have to. If she wants to spend it on lottery tickets, that’s fine. If she wants to save up a year’s worth and buy a $1,200 couch with it, that’s fine. It also means I have a slush fund to use to support my computer and train habits.

This discretionary $100–and there’s nothing particularly magical about $100, except that it was an amount that we could afford and still meet our other financial obligations–keeps us from feeling completely deprived. Some months that $100 goes pretty fast. But it’s not zero. It lets us prioritize.

The spreadsheet also helps you to make goals. I think the goals are pretty important, because it shows that there is a way to get the things you want or need. It doesn’t mean you can necessarily go out and buy everything all the neighbors are buying, but it provides a certain assurance that the projects you want will eventually get funded. Want a new car? Fine, set aside a few hundred dollars a month, watch the fund grow, then buy the car when you have enough money to do it.

I actually sat down back in July and mapped out how I was going to spend my discretionary money for the next 18 months. So I bought some memory one month (I didn’t have enough to buy everything, so I bought the memory), then the next month I bought a motherboard and CPU. The month after that, I bought a small SSD. It took three months, but after three months worth of spending, I had a pretty nice new computer. I re-mapped some things as I went along, based on things that happened to be on sale and based on whatever bothered me the most, but dollar-wise, I’ve stuck with the plan, and now I have reasonably up-to-date computer equipment that works well.

I don’t have everything I want, and neither does my wife, but we do have a road to get there. We have a fairly long list of things we want: new siding on the back of the house, new windows, hardwood floors, a car, and I’m sure I’m leaving some things out. We could go and buy all of it right now and take on $20,000-$30,000 in debt. And since that number is already so big, what’s another $5,000 or even $10,000, right? Well, that’s how you take on a crippling amount of debt. Save up and buy it when you have the money–and watch for sales, because sometimes you’ll get lucky and end up having enough earlier than you anticipated–and you’ll get those things eventually. And you’ll have a ready answer when the salesman tries to upsell you. What’s another $2,000 to step up to the super-premium deluxe version? Well, when you have cash in hand, and that’s all you have in hand, it’s a dealbreaker.

My dad didn’t always do things that way, but I do remember one time he was making a rather large purchase, and paying for it in cash. I don’t remember what the salesperson said, but Dad reached into his pocket, pulled out a really substantial-looking wad of cash, and acted like he was counting it out. The salesman stammered a little, looked around nervously, and shut up. It served as a very strong reminder that he was spending a pretty significant amount of money there, and very effectively sent the message not to get too greedy.

I think that’s why the hybrid approach works well. Technology is great, and it can save you a lot of time, but sometimes you just need to remind yourself and the salesman just how much money is involved. A number on a piece of paper is just a number. A pile of bills speaks a lot louder. And the closer the denominations you get match up to your hourly wage, the more it speaks to you, as you’re literally peeling off the number of hours you had to work to pay for that couch, or hardwood flooring, or whatever it may be.

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