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Dave Ramsey purists feel that the best way to get out of debt is to switch to using only physical cash. You know, the stuff you see in museums that people used to trade for donkeys and such. But how does that work in a practical sense for people that live in a world that has all but forgotten about cash? How do you buy things in a digital marketplace using physical money? What happens if you’re married, and both of you have lunch plans at work? Who gets the “lunch” envelope? I’ll show you the way Rachel and I manage our money, even without adopting a cash-only philosophy, and some other ways that may work better for your situation. Before we get there, though, there’s some stuff you can do to make the envelope system work a little smoother.
Get a Solid Start
Have you ever just gotten out of bed on the wrong foot? Your automatic coffeemaker didn’t start on time, the transportation department is doing surprise pothole maintenance all along your route to work, and you get to the office right as Larry is walking out of the break room with the last donut. Stupid Larry. It’s just going to be a bad day. Your money can snowball like that too, if you don’t clean it up at the very start. If you’re married, you and your spouse should be using a joint checking account where all your money gets pooled. I know some of you will disagree with me here, and the reasons you have may be valid in certain scenarios. But for the vast majority of couples, if you can trust the rest of your life to your spouse, you should be able to trust your money to them also. It’s just the easiest way to get a good, clean start on your money before it ever starts to go anywhere. Rachel and I tried using separate accounts for a while before our bank offered joint accounts, and while there weren’t any major blowups between us, we still had the mindset of “his” and “her” money. Combining it blurs the line of whose money it is, and forces us to see it as “our” money, which allows us to work as a team. If you’re single, you can ignore all that! You should only have one checking account (and a savings account, but we’ll get into that another time), and all your income should go into it. The point is, in order to take control of your money, you need to be able to see all of it. Having some go here and some go there isn’t helping you down the line. Just start with one pile.
Get On a Budget
Obviously, if you’re going to make this work, you’ve got to have a plan. Sticking money in envelopes does you no good if you don’t know why you’re doing it. I’ve already shown you our budget, and I hope you can see from our progress updates that it’s working. I’ve tweaked our budget since that post, but that’s the point. You’re still in control, and your budget will evolve as your situation changes. I think there’s a lot of misconception out there that budgets are bad because they limit how you can spend your money. Again, that’s the point. If the way you’ve been spending up until now has you worried about which credit card you’re going to pay this month, maybe some limitations are a good thing! But all a budget is is a sheet of paper (or page of an app, or file on a computer, however you want to do it). You get to be the one that decides where your money goes, and the only limit you have is your income. If you make $3,000 in a month, you only get to spend $3,000. How you spend it is completely up to you. The budget didn’t limit you with that, you limit you with that. But for most of us, a plan has to be made, otherwise we’re going to spend like we have no plan. For this post, I’m going to assume that you’re using the zero-based budget, which is what the envelope system is based on. That simply means that after your budget is done, you have zero dollars standing around wondering what to do. Every one of them has a job, and as soon as those dollars hit your bank account on payday, they get to work for you, improving your financial situation.
The classic envelope system, in case you haven’t heard of it before, works like this: You have a set of literal, paper envelopes that you put money in every payday. Those envelopes have categories written on them, like “Groceries,” “Car Gas,” “Electric Bill,” “Credit Card Payment,” and so on. Every payday, and according to the budget you’ve already made up, you take out your entire paycheck in cash, and go down the list filling every envelope until you run out of money. Then, throughout the month, as you spend on things, you pull the literal cash out of the literal envelope and literally hand it to the literal cashier. Once an envelope runs out of money, that’s it! You don’t get to spend anymore on that category until the next time it gets replenished with a paycheck. Seems like a foolproof way to get out of debt, right? You can’t overspend, you can’t owe any interest, you can’t run into overdraft fees; it all forces you to be responsible. And it worked great when the world ran on cash. But now that we have almost as much plastic in our wallets as we have in our cars, and we’re in those cars on the go all the time, it can become almost impossible to stick with physical cash, especially for married couples shuffling kids around. And when things get unnecessarily hard, we quit doing them. That’s just how we work. Here are some easy ways to incorporate a tried-and-true method into the modern day:
There are apps for everything out there, so it should be no surprise that personal finance apps are a dime a dozen (no pun intended… okay, maybe slightly intended). These help you look at your spending from a bird’s-eye view and give you more insight into areas you can cut back in. Once you’ve gotten a handle on what you’re making and what you’re spending, you can use these apps to divvy up your checking account into the various spending categories you’ll need to get through the month. They don’t make any actual changes to your bank account itself, but as long as you keep them updated accurately, you’ll be able to see how much you have left to spend without going into overdraft. Here are some favorites from around the interwebs, all of which are available on iOS, Android, and web interfaces:
You Need A Budget ($50/year) – YNAB has been around since September 2004, and being a teenager in the tech services world comes with serious credibility. The super-robust app is built around what they call the Four Rules: 1) Give every dollar a job, 2) Embrace your true expenses, 3) Roll with the punches, and 4) Age your money. A subscription to YNAB comes with the ability to pull your transactions directly from your bank, eliminating most of the hard work for you. You can edit your monthly budget on the fly, and all changes and transactions are synced automatically between all the different devices signed into your account. If you’re skeptical about the price tag, there’s a 34-day trial for new users that you can use to find out if it’s something you’ll stick with.
EveryDollar (Basic – Free | Plus – $99/year) – Dave Ramsey’s own offering is very similar to YNAB with the much more palatable price of “free,” but with one caveat: you have to keep track of your transactions yourself. It offers similar synchronization between devices and on-the-go budget editing for when Murphy strikes. The Plus purchase comes with the ability to pull transactions automatically as well as personalized coaching calls. Also, every new user gets a 15-day free trial of the Plus software, so here again, you can take it on a test drive first.
Mvelopes (Free/”Call For Quote”) – If you’re looking for something a little more in-depth, Mvelopes may be up your alley. The basic, free version of the app will give you an unspecified number of budget categories, or envelopes, as well as do that awesome synchronization goodness from your bank account. They also offer reporting that helps you visualize your spending and income and tracks your net worth. From there, there’s a mid-tier Premier option that gains you access to unlimited budget envelopes, a debt reduction plan, and some eBooks and videos geared towards helping you gain better control over your finances. Still not enough? Opt for the Coaching level and you’ll get access to 1-on-1 monthly coaching sessions, personalized help building your budget, advice on retirement savings, and an accountability partner to help make sure you stay on track. There’s no listed price for the Premier or Coaching levels, so I assume it’s based on your income and the level of support you’re looking to get from them. Again, a free basic tier means there’s no harm in trying it out for a while and seeing if it’s right for you.
The Nuclear Option
Alright, so the thought of yet another app on your home screen that you have to remember to check and update doesn’t really sound any more convenient than lugging around a ton of cash? Wouldn’t it be easier if your bank just did all this envelope stuff for you? If you’re ready to dive in headfirst to this whole budgeting thing and maybe even switch banks, you should check out Simple.
While Simple isn’t technically a bank, an easy way to think of them is like someone took a bank, completely overhauled their interface to make them super user-friendly, and then replaced all their customer service robots with actual humans. The result? You get normal, everyday banking abilities like an FDIC-insured checking account (individual or joint) and a Visa debit card to go along with it, courtesy of BBVA Compass, who provides the actual bank account portion. But you also get awesome 21st-century extras like beautiful web and mobile device apps, spending analysis to see where the holes in your wallet are, 7-day-a-week customer service with real people on the other end of the phone, and you guessed it: fully integrated envelope-style budgeting. Rachel and I have been using Simple since we got together and it’s such a game changer. If I had one complaint about their budgeting feature– they call it Goals– it’s that there’s no monthly overview like you get with the apps I mentioned above. But as far as actually using the “envelopes,” there’s no easier way to do it than having it integrated directly into your bank account.
How do we actually do the envelope system? Every payday, our money gets dumped into our joint account. We use the Excel sheet I make every month (gotta mix the ancient ways with the new technology, ya know?) to see where we had planned for each dollar to go, and divide the paychecks up among the Goals in Simple, which mirror the categories on that sheet. If we earn more than expected, the extra goes towards the current snowball item. If we earn less, we talk together to figure out what doesn’t make the funding cut. As we go through the month, we each have instant access to the Goals to see how much we can spend from each category. As soon as one of us makes a purchase, it shows up in the app and gets categorized. That’s it! No shuffling envelopes, no forgetting the “dinner” envelope at home on a date, and no angry stares from the people behind us as we count out $20 bills at the grocery store. It’s an old-school system with a modern twist, and it’s crucial to us taking control of our finances.
What about you? How do you use technology to help keep track of your finances?