Living on a Budget

Budgeting: Modified Cash Envelope System

Welcome back to Week 3 in my short budgeting series!

Some of you may have heard of a cash envelope system. I have read Dave Ramsey and know this is often recommended by him, as well as many other budgeting gurus out there. I both like and dislike this system.

For individuals and families on a tight budget, who are not aware of what they are spending where every week, this would be a great option. Once the money’s gone, the money’s gone and that is that. There is no question about what money is supposed to be spent where.

People like my husband, however, have a pretty good sense of their financial situation and hate carrying cash. He also hates carrying envelopes as they are inconvenient and he often needs to return home prior to going anywhere that extra money is to be spent.

So, he and I discussed our options and came up with what I am calling a modified cash envelope system. Bear in mind that Mr. O and I sat down, together and formulated this system. We discussed how much to save, how much to spend, where to place our extra money efforts, etc. It was a team effort. I accentuate this idea because I truly believe that for a financial budget to be successful, all parties involved need to be on the same page, with the same goals in mind and a common understanding of the chosen budgeting efforts.

First, we created multiple savings accounts within our shared bank account. I am sure you could do something similar if you have decided to keep your bank account separate from your spouses, but I find this method super easy. It also allows us to hold one another accountable because we have access to the same information (though purchasing gifts for one another can be a challenge…)

  1. We pay all of our bills out of our checking account. These are the non-negotiables that must be paid every month. As I mentioned last time, I simply designate which paycheck each bill is coming out of.
  2. We also put money for our mortgage payment into a separate savings account each month. This may seem tedious, but we can’t afford our full payment from one paycheck with our other bills accounted for. So, to ensure that we have enough money every month to pay it, I designate a certain amount with each paycheck, moving the money into a separate account until the payment is due. Alternatively, you could potentially make two or three payments to the mortgage, rather than transferring to savings.

We have 3 other main accounts: House Fund, Travel Fund and Emergency Savings

**The ability to have these accounts at all completely depends on your non-negotiable expenses. IF there is money available after everything else, you have the flexibility to decide how much to put into accounts like these.

  • For us, we have chosen for our House Fund to cover: medical expenses, vehicle maintenance and house maintenance. You never know when something unplanned for will arise, so it is good to have a small amount of cash saved to prepare for these moments. If we end up with an excess amount in this account, we have used it for home improvement projects but you want to be careful here to not drain the account. Cushion is good.
  • Travel is a smaller budget for us but can be utilized to rent a hotel room, travel to see family, etc. It can cover gas, food or any other expenses while traveling. Or, if we want to save up for a vacation, this is where the money for it can be stored. In the case of our last vacation, we were able to roughly estimate how much it would cost and divided that amount by the months we had until the trip. Luckily, our adventure was almost completely paid for before we even left! What a great feeling.
  • Emergency Savings. As I mentioned last time, you want to establish a small savings just for backup in case something in your life goes array…and it almost always does. Set a small goal for yourself. $1000, $2000, etc. Whatever seems feasible.

**After an initial small savings, I recommend focusing on getting rid of some debt before setting another goal for a more established savings account. If your savings account isn’t built up, you truly shouldn’t be dropping money into a travel fund or a fund that would allow you to purchase extra, unnecessary items for your home. Ideally, your savings account will eventually house 3 months worth of money to survive on should you or your partner be unable to work.

AFTER all of this is done, we still carry some cash. This is our “play money”. But remember, if you are on a tight budget and trying to reduce some debt, this area of your finances may not be an option for awhile. But trust me, if you focus on eliminating some debt, such as a loan payment, you will eventually pay off that loan, freeing up a couple hundred dollars each month 🙂

For our modified envelope system we have a budget for groceries, dog food, date nights and individual “play money”. Each paycheck, I take the designated amount out of our bank account and place it in each respective envelope. The grocery budget now needs to last us 2 weeks. Our “play money” is paid out a month at a time. Since these are our more flexible spending categories, actively paying with cash and knowing how much remains requires us to be more conscious of our spending choices. This keeps our grocery budget under control. At the same time, if I want to save up for a special purchase on my own, it may take a few months of avoiding Starbucks cappuccinos so that I have the extra money to spend.

Mr. O. and I decided that having individual “play money” is important to us. I love learning about and exploring essential oils. He’s a beer guy. I like to buy gifts for friends and family sometimes. We both enjoy a fancy coffee now and then. We also need clothes and shoes occasionally. We also know that none of these items are required for our survival and can’t justify putting them into our budget on a regular basis. Plus, it feels a little silly asking one another all the time if we have enough extra money to make a fun purchase. Why? What seems worth the cost to me doesn’t necessarily seem worth it to him. This is a new budget category for us, but I am hoping it alleviates some of the financial stress involving these situations and we both feel as though we have a little bit more financial freedom.  

Tune in during the next couple of weeks for “snowballing basics”!

Happy Budgeting!

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