By Seth Busetti
We used the cash envelope system for most of our marriage. Then a few years ago we switched over to a virtual budget management approach. It was a trial in modernizing our finances. In this post I will summarize why we moved away from the cash envelope system, and why after running the experiment for few years we are going back.
Just about anybody who has taken a personal finance course knows about the cash envelope system, and there are now numerous personal envelope solutions available. The technique is part of the basic training from Financial Peace University, where it gained a cult-like fan base, but you can even buy custom folders and envelopes on Etsy or Amazon. Basically, rather than swiping a debit card when you need to buy something, you pay in paper-bills and coins (retro, right?). Once you have created an itemized budget (like our downloadable free spreadsheet), you designate envelopes for each category: gas, groceries, restaurants, etc. If you need to pick up a gallon of milk or want to spend personal money on a sweet Craigslist find, you get your money from the appropriate envelope. No money, no buy. Here’s a picture of the envelope system we used for over a decade.
Working It: Over a Decade On Envelopes
We used this very folder and budget for over ten years. In the beginning, we had a very simple lifestyle: no kids, few expenses, low income, no investments, etc. Also, at that time (mid 2000s) online bill-pay wasn’t nearly as popular or secure, so we used paper checks for big things like mortgage payments and took cash for everything else. In late 2009 our finances increased by a step change when I started working in the oil industry and started making a healthy professional salary. At the same time, we started adding kids, beginning with our twin girls. Though several areas of the budget and our lifestyle enlarged a bit, we still maintained the envelope system! We added or expanded envelopes to account for kids’ clothing, lawn care, diapers, highway tolls, etc.
Financial Tip #1: Life is transitional, your finances will be too. If something in your life has significantly changed, it is time to update your financial strategy.
Healthy and Complacent: Or, Envelope Shmenvelope?
After many years of career stability and flourishing financial health, we found ourselves in a very good place: we were debt free, had 6 months of savings, were aggressively growing retirement and other investments, and could rely on both ample and stable cash flow. This was great, but we had gotten comfortable with our situation and discovered that in a few areas laziness had crept in.
“Hey would you pick up some ice cream on the way home from work. Just use the debit card. We have money in the envelopes and will sort it out later.”
“I’m home, I got the ice cream and also some fudge and whipped cream. Oh, and we needed a new garden hose. I’m pretty sure we have plenty of money in the ‘House Maintenance’ envelope. Oh and I got some sunglasses for myself. Here’s a crinkled half of a receipt, the rest got torn off when the machine jammed.”
Thus, we entered a season around 2015-2016 where prosperity and excellent accounting actually led to lack of discipline. We had the money. We had spending sorted out. We stayed in budget. We had sufficient cash surplus to cover planning mishaps and spontaneous situations. For any given month we would have $500-$1500 sitting in our cash box waiting to be back-paid and then sorted into envelopes. Rather than a streamlined envelope system, per design, we ended up creating a petty cash monster!
Financial Tip #2: The inconvenience of pre-planning always is less than the headache of sorting things out later.
Get with the Now: Going Digital
We realized our “figure it out later” behaviors were not going to support our goals. Right around the same time Ramsey’s EasyDollar was gaining popularity. What if we could just keep the money in the checking account and use virtual envelopes? Sounded great, go digital, use an app, get with the times. So over the course of a few months we switched our physical envelope system over to a fully digital one. Need to know how much money is left in the “Seth Personal” envelope? Just check the app! Once a payment posts from the bank (the account is neatly linked via the app), just apply the charge to the proper virtual envelope, and voila! (*Somebody is going to point out that if using an app, you could also enter everything manually in real time while standing in the check out line; however, that defeats the benefit of automation and having your bank account linked). Despite the case I’m going to make in the next few paragraphs, the virtual envelope system can be very successful, we know how to use it, and we know many families have had great success. Awesome for you if you’ve got it working seamlessly to suit your needs. But allow me to share a few ways that system failed our needs.
- Whereas cash transactions are always immediate (the balance of the physical envelope is always current), debit charges can take days or even weeks to post, depending on the store and the bank. So you have to keep track of what you spent and when you spent it until the changes come in, which adds another level of accounting. And I’m terrible with receipts.
- Not all vendor names are clear. We would stop for gas at the Chevron station just outside of town, but a few days later the $67.23 charge would show up as Store #A-1 or something obscure, and then a week or two later when Alexis would try to reconcile the check register we’d both struggle to remember what the charge was.
- A common trip to a place like Target shows up as a single debit post. We’d go to the store and buy some groceries, some clothes, office supplies, and dog food – four different envelopes. But the charge would show up as $140.72, Target. So to account for that single trip we’d have to save the receipt (for days or weeks) in order to back out each of the categories.
- I personally find deciding what to buy in advance, then digging in envelopes to get the right amount of money and paying in cash to be much less stressful than logging receipts in my phone. Actually, up front, just swiping is super stress-free…it’s the tail end of that that doesn’t suit me well and I was making Alexis’ job so much harder. Bad husband! I’m a big picture guy, great at creating a budget and living within it, but lousy at tracking. Whatever system you use, both husband and wife need to do well with it, and we’re just not doing as well with the 100% virtual envelope method as we could be with another approach.
- Balancing the checkbook on the all-virtual system has been the straw that broke the camel’s back. Alexis does 98% of bookkeeping task because of her attention to detail and endurance to fish out every lost penny in getting the books reconciled. And frankly the burden on her has been unsustainable. Some weeks, after a family vacation or period of chaotic spending (life happens), she would spend 4-8 hours on it…no bueno! Even in a calm month there are 30+ expenses that have to be sorted, which takes time. Add trying to deconvolve receipts. Add trying to track down dozens of charges that posted out of sequence. Add finding clerical errors, miscalculations, the bank posting things in weird ways – it all takes time.
Financial Tip #3: Just because a technique works for somebody else doesn’t mean it works for you. Find a financial strategy that you are able to master with the least amount of effort and stress.
So, the bottom line is that we’re going to try moving back to cash envelopes. Our foray into hip modern accounting has been educational, and there are many benefits. But for us, going completely paper-free has been the worst system we have used in 15 years of marriage!
Before you start getting all high and mighty and calling us dinosaurs or sending comments about how we’re inept with the app, I will note that there are a few spending categories that we plan to keep virtual. For one, we’re going to keep using the debit card for gas purchases. Also, we’re keeping a majority of our grocery budget virtual so that we can take advantage of online ordering and curbside pickup service. Alexis encourages most of her clients to create spending categories called sinking funds, which are stashes of money for irregular or periodic purchases. We’ll keep our sinking funds virtual and sorted on EveryDollar, things like kids’ school supplies and books – or car repairs. We’ll figure something out for Amazon or other online purchases. But the frequent, everyday stuff (100s of transactions!) that was bogging us down will go back to cash in order to get our accounting and spending disciplines back to where we want them.
Financial Tip #4: Don’t forget to factor your time and sanity into your financial plan. As your life and commitments change (family, work, extracurricular), make it a priority to revise the financial plan to optimize your balance for what is livable.
Growing in Discipline: Next Level Training
For us, making an effort to tighten up our financial disciplines is about forward motion. For many people (and we’ve been there too) you’ve got to focus on plugging the holes that are sinking your ship. This is critical too, you’ve got to get free of debt and build a foundation if you want to grow. But don’t think that financial disciplines are just about moving from broke to not broke. Alexis and I have some pretty aggressive financial goals that we know can’t be realized if we don’t continue to grow. We can’t accomplish our dreams with a “good enough” attitude. I remember reading that even late into his career, Peyton Manning would record video of himself during practice in order to review his footwork, throwing motions, and on-field presence, all in order to correct anything that might be detracting from his game and to find new ways to improve his performance. This attitude of excellence is attainable to us as well in our finances if we’re willing to correct and find new ways to improve. If what you have to do to move forward isn’t fancy or modern or culturally hip or what your friends are doing, then so what. The more important question is, is it working for you?
Financial Tip #5: If you run your finances like everybody else does, you will find yourself in the same mediocre “good enough” financial situation as everybody else. Find some behaviors that work for you and differentiate your discipline and commitment to financial excellence.
We would love to talk with you about your financial situation. You can send us a question through our contact form, or easily set up a free consultation using our online scheduling system. Be sure to check out our 90 day financial workbook, you can get started on your own or as guided coaching with Alexis, individually or in a small group.
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