2697: Can’t Stick to a Budget? Here’s the Solution by Jen Hayes on Dave Ramsey's Cash Envelope System

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[00:00:54] This is Optimal Finance Daily, episode 2697.

[00:00:58] Can't stick to a budget? Here's the solution.

[00:01:01] By Jen Hayes of JenHayes.me.

[00:01:04] And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:08] Welcome back to Optimal Finance Daily, where I'm here with you each and every day,

[00:01:12] reading from some of the world's best personal finance blogs.

[00:01:15] So with that, let's get right to today's article and start optimizing your life.

[00:01:24] Can't stick to a budget? Here's the solution.

[00:01:27] By Jen Hayes of JenHayes.me.

[00:01:30] Most of us have good intentions when it comes to budgeting.

[00:01:34] We create a spreadsheet, set a maximum spending amount for each category,

[00:01:38] and plan to stick to our budgets faithfully.

[00:01:40] Then we forget about it.

[00:01:42] We might have a general idea of how much we plan to spend in each category,

[00:01:46] but we swipe our debit cards all the time without even really thinking about it.

[00:01:51] Maybe we log into our bank accounts two weeks later and realize we're way over budget.

[00:01:56] Oops!

[00:01:57] Personal finance expert Dave Ramsey claims that Americans have lost our ability to feel money.

[00:02:03] Society has made it far too easy for us to spend money on autopilot.

[00:02:07] We can go on a shopping spree with just a few clicks on a computer,

[00:02:11] pay with a credit card and forget about it until we get the bill a month later.

[00:02:15] Our tendency to swipe cards without tracking what we're doing makes it difficult to stick to a budget.

[00:02:21] Dave recommends the cash envelope system for budgeting.

[00:02:25] What's the cash envelope system?

[00:02:28] With this method, you'll have a separate cash envelope for each category of your budget.

[00:02:33] For example, you may have an envelope for eating out, another for clothes, one for groceries, and so on.

[00:02:39] You might put $100 in the eating out envelope, $50 in the clothes envelope,

[00:02:44] and $400 in the groceries envelope.

[00:02:47] Once you run out of cash in the envelope, you're no longer allowed to spend money in that category.

[00:02:52] You might get your $100 for eating out already, no more eating out for the rest of the month.

[00:02:57] Why it works?

[00:02:59] The purpose of using cash is to get you to feel money again.

[00:03:03] When we can physically see the money being taken away from us,

[00:03:06] we're more mindful about the purchases we make, in theory.

[00:03:10] We no longer shop on autopilot, and we become more intentional about our spending.

[00:03:15] It's also much easier to track this way.

[00:03:17] All you need to do is get out your envelope and quickly count how much cash is remaining for the relevant category.

[00:03:22] There's no need to update a spreadsheet every day or log into your bank account daily.

[00:03:27] In short, the cash envelope system forces you to not overspend.

[00:03:32] When the money runs out, you're done.

[00:03:34] Encourages you to spend less, makes you more intentional with your money,

[00:03:39] reminds you that you have a limited amount to spend,

[00:03:43] and gives you an easy visual of how much money you have.

[00:03:47] How do I start using the cash envelope system?

[00:03:51] Step 1. Create a budget.

[00:03:53] The first step is to create a monthly budget.

[00:03:56] Once you have an amount set for each category, you can select your envelopes.

[00:04:00] Step 2. Choose categories for envelopes.

[00:04:04] Your budget may contain 30-plus different categories,

[00:04:07] but you probably don't want to carry 30 envelopes with you everywhere you go.

[00:04:11] That's okay. There's no need for that.

[00:04:13] Instead, select 5-10 categories that you'll use for your envelopes.

[00:04:18] The best ones to choose are variable expenses.

[00:04:21] You don't need an envelope for your mortgage payment or your cell phone bill

[00:04:24] if you pay the same amount every month and it's automatically withdrawn from your account.

[00:04:28] Here are some examples of categories you may want to include for your envelopes.

[00:04:33] Groceries, eating out, entertainment or date nights,

[00:04:37] clothes, haircuts, makeup or beauty, discretionary spending,

[00:04:42] hobbies like art supplies, scrapbooking, etc.,

[00:04:46] coffee and miscellaneous.

[00:04:49] It's entirely up to you. Do whatever makes the most sense for you.

[00:04:53] Most categories include groceries, fast food, date nights,

[00:04:57] outings with friends, household items and drug store items,

[00:05:01] and spending, miscellaneous.

[00:05:04] Step 3. Choose your envelopes.

[00:05:07] If you don't want to spend money on new envelopes

[00:05:10] and you already have some old mailing envelopes lying around, those will work just fine.

[00:05:14] Simply write the name of the category on each envelope and you're good to go.

[00:05:18] Maybe you'd prefer envelopes that are more visually appealing.

[00:05:21] There are tons of options for cash envelopes out there,

[00:05:24] but you don't want to overspend on a system that's supposed to help you save money.

[00:05:28] Frequently asked questions about cash envelopes.

[00:05:31] Here's some of the most common issues that you may run into when you're using the cash envelope system.

[00:05:37] What if I have extra money at the end of the month?

[00:05:40] Congrats! You're doing a great job of not overspending.

[00:05:43] It's up to you to decide what you'd like to do with the extra money.

[00:05:47] You may want to set up some ground rules about extra money before you begin.

[00:05:51] Here are some ideas.

[00:05:53] Carry over the money into the next month.

[00:05:56] Put the money in savings or add it to retirement accounts.

[00:05:59] Add the money to your debt snowball if you're currently working on paying off debt.

[00:06:03] Buy yourself a present or do something fun with the money.

[00:06:06] Or give the money to charity.

[00:06:09] Can I move money from one envelope to another?

[00:06:12] Yes, you can do this.

[00:06:14] If it happens occasionally, I think that's fine.

[00:06:16] However, if you find yourself moving money around all the time, that's a sign of a problem.

[00:06:21] At that point, reevaluate your budget and make adjustments as needed.

[00:06:25] For example, let's say your budget includes $100 for fast food,

[00:06:29] but you always have extra money in this envelope that you end up moving to your clothes envelope.

[00:06:33] The solution to this is to decrease your budget amount for eating out

[00:06:37] and increase the amount allotted for clothes.

[00:06:40] There's nothing wrong with reevaluating your budget and making adjustments as needed.

[00:06:44] This does not mean that your budget failed or that you suck at budgeting.

[00:06:48] When you first start budgeting,

[00:06:50] you probably won't be sure exactly how much money is appropriate for each category.

[00:06:54] So there will be some trial and error. That's totally fine.

[00:06:58] From budgeting mess to cash envelope success.

[00:07:02] Ready to stick to a budget once and for all?

[00:07:05] Try the cash envelope system.

[00:07:07] This method will allow you to truly feel money again.

[00:07:10] You'll take your spending out of autopilot and put yourself back in the driver's seat.

[00:07:15] Remember this quote from Dave Ramsey.

[00:07:18] If you can't control your money, the lack of it will forever control you.

[00:07:22] End quote.

[00:07:24] Take control of your spending and live like no one else now,

[00:07:27] so later you can live like no one else.

[00:07:34] You just listened to the post titled,

[00:07:36] Can't Stick to a Budget? Here's the solution by Jen Hayes of JenHayes.me

[00:07:41] and I'll be right back with my commentary.

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[00:09:35] Paying for everything in cash is a great tactic to rein in spending if you find yourself mindlessly swiping your credit card.

[00:09:43] When I was getting out of debt, I stopped using credit cards and paid for everything with my debit card while also tracking every dollar I spent in an app on my phone.

[00:09:52] Regardless of how you go about it, I think both cash envelopes and tracking your spending get you to the same goal.

[00:09:59] They bring more awareness to where you're spending money.

[00:10:02] I suggest pairing a cash spending-only strategy alongside a budget that you're consistently reviewing and tweaking.

[00:10:10] Awareness alone isn't enough to change your habits.

[00:10:12] You need to take those insights you gained from your increased awareness and use them to strategize around your budget.

[00:10:18] I think the goal here is to get yourself to a place where you're consistently living below your means.

[00:10:24] Once those healthy spending habits are in place, you'll need to think about this stuff a whole lot less,

[00:10:29] and then you can move beyond cash spending and optimize credit card usage for the reward benefits.

[00:10:36] I personally focus on credit card churning, where I open a card, spend just enough to earn the signing bonus,

[00:10:42] and then move on to the next card that has a good signing bonus at the time.

[00:10:45] So I'm only ever spending on one card at a time. It makes it so much easier to track my spending as well.

[00:10:51] Now keep in mind that I only started having fun with credit cards in this way after I got completely out of debt

[00:10:57] and overcame any temptation to overspend.

[00:11:00] This only works out favorably for me because I'm 100% committed to never carrying a credit card balance again.

[00:11:07] And that'll do it for another edition of Optimal Finance Daily.

[00:11:11] Thanks so much for joining today and every day, and I'll be back again tomorrow.

[00:11:15] So I'll see you there where your optimal life awaits.