Monday, October 14, 2013

Free Envelope Budgeting System

We've all heard the financial gurus tell you about the benefits of cash. From Suze Orman to Dave Ramsey, cash is considered king whenever you are trying to control your budget. Each person explains a proprietary system to do this. I want to give you a cash management system for free.
I love to use cash because there is no late payments or interest. Its finite (which can be a double edged sword) and you can physically see how much is left in your personal budget. It pains me to break a 100 for a 35 dollar transaction. Since it is normal for humans to avoid pain, I tend to really think hard about breaking large bills for transactions.
Lets first debunk some common issues why people do not use cash. Whenever I think about it, it really boils down to two main issues against the use of cash.
Cash is unsafe, or I need a credit card for something something.
Lets discuss "Cash is unsafe". You may hear this rephrased as: "Cash can be stolen, lost, you can be mugged, etc..."
This is true. You can be mugged, cash be lost, a wallet stolen. Also a meteor. could crash on your head. I'm not denying that this cannot happen, but basic common sense can prevent many of these issues; however, let me tell you this. If you lose your cash, you can be out a couple hundred dollars (if you decide to carry that much).
But what is worse? Losing a couple bucks or Identity Theft? If you didn't know. The average amount lost because of Identity theft is $5,000. Not to mention the months it takes to fight collectors and to repair your credit. Yes, cash has risks, but compared to the cost of Identity theft, its a drop in the bucket.
The second most common excuse not to use cash is that you need a credit card for:
  • Car rentals
  • Credit rating
  • Online Transactions
  • Security (which deals with Identity Theft)
  • Ease
  • Online tracking of spending.
  • Other reasons.
Unlike some people. I don't believe in getting rid of all credit cards. I have two I use and 2 I keep open just for credit ratings. I budget out what I plan to spend and if that needs a credit card. I automatically set aside in cash that money, so when I do swipe the card, I can pay it in full. This works well when coupled with a good rewards card.
Enough being a cash apologetic. Lets talk about the system:
The CIK System (Cash Is King):
In our checking account we have a 100 dollar buffer, money to cover the months bills and fuel cost (my wife doesn't like paying cash at the gas station), and we deposit from our cash pile (more like a mole hill) whenever I use the credit card. The rest of our expenses is withdrawn once a week in cash at the ATM, and that is what we use for the week. This allows us to keep on budget while not having to give up our auto bill pay. We place the cash in envelopes with the budget category on the outside and amount on the outside (we use Dave Ramsey's envelope system for this). Just like a check register, we record transactions. Once the money is gone, its done. No running to the ATM or swiping a card. In the rare event that we don't have enough cash to pay for something (like at a restaurant) we swipe then afterwards deposit the cash ASAP.
Doing this method my wife and I save $300 dollars a month and here is how we did it in nine steps:
  1. Total all the money you spend in a month.
  2. Subtract all bills that are deducted automatically or could be paid with Auto Bill Pay.
  3. Once you have the total divide it by 4 (4 weeks in a month).
  4. KEY PART: Take the weekly total and subtract 10%. Round down to the next smallest domination your ATM will issue*.
  5. Distribute cash to envelopes.
  6. Repeat once a week.
  7. Every month try to increase the 10% in increments of 5. I managed to get my family to 20%. You can almost make this a game. Adjust as needed, but always aim for at least 10%.
  8. Your checking account should have a $100 dollar buffer*, money to cover fuel cost if you do not want to use cash, and money to cover your bills.
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