It’s the end of the month and the bills are paid, but I’ve run out of money for anything else. I’m so tired of cooking and cleaning. I would really like to watch the closing ceremony of the Olympics with a really yummy pizza. One big problem…I have no money.
Living on a fixed income is a real struggle.
Not being employed any longer and receiving my monthly income just one day per month is very challenging. I have had to learn how to stretch out that one payday for an entire month. Sometimes, I don’t make very good shopping decisions. The temptations are great and I sometimes shop compulsively.
So, how do you prepare yourself for the unexpected? What happens when you need a special outfit for a special occasion and you don’t have any money? What if you reach the end of the month and you realize you don’t have enough money to put gasoline in your vehicle? What about those nights when you just really want to enjoy a pizza?
Let’s talk about the cash envelope system.
I have read and heard both sides of the argument regarding this budgeting system. It seems that so-called financial experts either really like this system or they are completely against it. Dave Ramsey is said to be the leading expert and software maker for this system. He refers to his system as “a key component of the Total Money Makeover plan because it works.” Other economists will tell you not to use this system because you are not making the most out of your money.
Who can benefit from this system?
If you are on a very low and fixed income then this system works. If you have bad credit or no credit then this system works. If you don’t have retirement accounts, large savings, and expensive assets then this system works.
Julie’s workable version of the cash envelope system.
Let’s look at the various steps to take in order to make this system work for you:
- If possible, sign up for direct deposit into a checking account for the source of your income. This will make it easier. If you receive social security each month, do not use their debit card. Instead, elect to have your monthly check deposited directly into your account. You’ll understand why in a bit.
- Once your income has been deposited, pay all of your monthly bills. This is what is referred to as your “essentials.” These bills include rent, heating, electricity, insurance, trash collection, etc. These are the bills that HAVE to be paid each month, no matter what and the amount is fairly fixed.
- If your bill due dates are scattered across the month, get them changed. Most companies are very willing to work with you and move your bill due date to one that is more convenient for you. Remember, they want your money so make them work with you!
- Now is the time to get out your blank and empty envelopes. You can use whatever style, shape, and color of envelope you choose. On the front of each envelope, you are going to write down all of your discretionary income categories. For me, this includes gasoline, clothing, food, prescriptions, entertainment, and a few others. You will need to identify your own spending habits and make your own categories.
- Write on the front of each envelope the name of your category and the dollar amount you have calculated you need for stated expense. Do this for every envelope you have created.
- Now is the fun time! Go to the bank and withdraw cash. Figure out the exact amount of cash you need to fill each envelope. I usually write down on a sheet of paper what denominations I need. So, if I have my ‘food’ envelope and I need $125 dollars, then I will get 6-$20’s and 1-$5. I never put $100 bills in any of my envelopes because I don’t want to carry that large amount of cash with me at any given time.
- This is where you will see this system work. When you are ready to go purchase some groceries, remove the cash you have set aside from your ‘food’ envelope. Take this with you. Leave your debit card, credit card or any other method of payment at home. You can only spend the cash you have in your envelope! When you return home, put the money you have leftover back into the ‘food’ envelope. This is now the money you have left for groceries until you get paid again.
- This is what you do with every single envelope regarding every single monthly expense you have.
- Watch the amount in each envelope closely. When you run out of money in your envelope, then that is all of the money you have until the next month.
- At the end of the month just before you get paid, go look at any money you have left in each of your envelopes. You have several options at this point. You can leave the leftover money in the envelope to add to what is available for the next month. You can move the money into a different envelope for something upcoming you want or need. You can remove the money and reward yourself for only spending within your budget. The choice is yours.
- Here are some very important things you should NOT do:
- Don’t overspend from one envelope by removing money from another envelope. Eat leftovers, use public transportation, and stop leaving the lights on all over your house. Do whatever you need to in order to stay within your budget for each envelope.
- Don’t tell yourself it’s ok to use your debit card or credit card. It’s not ok. The whole purpose of using this system is to stay within your budget and even try to save money. Don’t cheat and find yourself in debt.
- Don’t spend a lot of money in an ‘extra’ category/expense when you have debt to pay off. Pay off your debt first! Get rid of unneeded extra expenses until you pay off your debt.
- Don’t give up! This system works. It takes patience and practice.
If you realize you don’t have enough money for all of your envelopes, then it’s time to take a good look at your spending. It’s time to look for things you can remove or limit from your monthly budget. Personally, I had my cable television subscription canceled. I went with a significantly cheaper cell phone and plan. I quit driving so much and making unnecessary trips. I started shopping smarter and buying items only if they are on sale.
There are so many ways to budget and save money. You have to find a system that works for you. This is something I can use every month and even have money leftover.
So, who’s buying me pizza? My place or yours?