Because most philosophies that frown on reproduction don't survive.

Monday, May 03, 2010

Forcing Mechanisms: Cash Budgeting

The Darwin household has now been operating for about four months on a modified version of Dave Ramsey's budgeting ideas. This means that we've basically stopped using the credit cards (though contrary to Ramsey's advice, we still carry them for emergencies and have a few recurring bills that post to them each month) and even the debit card, and instead pull out an allotment of cash for all in-person purchases each pay cycle.

This at first felt very alien to us, as both of us have, by habit, not been people who carry much of any cash around. Going down to the bank and withdrawing anywhere from 500 to 900 dollars in cash still feels strange, this compounded by the way that the teller's eyebrows go up as she says, "And what kind of bills do you want for that?"

However, of all the Ramsey suggestions, cash budgeting is the one that we've found the most useful and followed most closely. The reason is that it makes keeping to one's budget very, very easy.

As inveterate planners, we are both very fond of budgets. There's a precise pleasure to planning out exactly how things will work for the next several months and seeing the rows and columns neatly add up. The problem is that while we both enjoy planning a great deal, we are both very bad at actually following a routine consistently. Self denial we can handle, and so a couple weeks of very low food spending and no "extras" is easily accomplished. But saving receipts and totaling them up every night is something we have never been able to do consistently. And so the analysis as to how closely we were meeting our budget would fall by the wayside, and after the initial burst of frugality, things would fall apart and we'd go back to that magical equilibrium in which outflows equal inflows and extra loan payments and extra savings don't seem to be happening.

Pulling out an allotment of cash based on planned in-person spending makes budgeting pretty much automatic. If you know that you have $500 to make all in-person purchases during a two week period, you don't need to to keep receipts and do nightly tallying-up in order to see how you're doing. Every time you open your wallet, it's clear how much money remains. Indeed, though we have a spreadsheet where we keep track of in-week spending by category to compare with our budget, we've stopped using the "envelope method" of splitting cash up into allotments for each spending category (thus avoiding the discussions of "Are diapers grocery or household if I buy them at the supermarket at the same time as groceries? Are gardening supplies household, home maintenance, entertainment or personal spending?) and started simply using a single slush fund of cash for each pay cycle which we split between the two of us based on who is doing the major weekly shopping runs. We have spending broken out by category in the budget, in order to arrive at the total amount of cash to withdraw, so we have a basic idea of what we can and can't afford in the current paycycle. But actual budgeting within the paycycle does itself by means of the simple "How much do I have left?" calculation.

Thus, while I don't share Ramsey's horror of credit cards themselves, cash budgeting is probably one of the tools that we will continue to use most consistently from here on out. It acts as a forcing mechanism in regards to budgeting. You no longer really have to put any thought or effort into staying in budget, so long as you don't spend more cash than you took out.


Dorian Speed said...

Yeah, we should try that. You should see the receipt entries from January 1-12 of this year, though. Down to the CENT.

Chris Burgwald said...

We've been following Ramsey's general plan for about five years, also modified in our case: for us, that means that we *do* use credit cards, but we also track our spending assiduously (I'm an Excel geek when it comes to budgeting).

Having said that, we've long wondered if and how much we'd save if we actually used cash instead of credit cards.

Out of curiosity, what are your thoughts on Dave's investment advice? I think he's all wet here, to be honest... index funds all the way! :-)

Darwin said...

Going to the cash budgeting we've cut monthly non-bill spending down by 40% -- I've been kind of amazed at how effective it's been. Though the current level of budgetary tightness is something that probably couldn't be maintained without specific goals in mind.

To be honest, I barely read Ramsey's chapters on investment advice. I'm pretty set on the idea of index funds rather than managed ones -- being an emergent order kind of guy I'm much more willing to bet on the US economy than I am on the intuition of a particular fund manager.

bearing said...

Here is a counterintuitive suggestion that may streamline budgeting for those who prefer to spend everything using credit cards (paying it in full each month, by the way) so that the credit card company tracks the spending for you:

Divide your budget up not by category of item (food, gas, cleaning supplies, etc) but by store you charge it at.

This makes it extremely easy to import the data and there's no niggling about "well twenty-two dollars of this was groceries and the other forty-six fifty was entertainment..."

We have a budget category for Cub Foods, another for Target plus Wal-Mart, another for Office Max, another for Amazon plus all other booksellers (even if I buy a garlic press from Amazon, it goes against the Amazon budget), another for all restaurants.

Big Tex said...

We're following a somewhat modified Ramsey plan... for about two years now. Trying to burn down student loans. So, we've canceled the credit cards, yet we purchase much with the bank/debit card. We still aren't comfortable with the carrying a lump of cash around.

Anonymous said...

We do use a credit card, but with a twist. Here's our twist:

Download credit transactions into Quicken every single morning. Then pay the credit card company the amount charged (through free online BillPay) immediately.

So we do get the cash effect. We're technically borrowing money for a day or so at a time, but see the bank account dwindle as we spend $. The bank account represents what we have left for that pay period (as savings is transferred to a separate savings account automatically when each paycheck hits).

There are lots of ways to do this. For those who don't like to carry a lot of cash, this is one way.

nicole said...

We have been using cash on the envelope system for a couple of years, with a month here and there where we failed to pull cash out and used debit cards. We inevitably spent more in those months. We still don't have our cash system down perfectly, but we have seen a drastic decrease in spending using cash. We cut up our credit cards and haven't used them in two years. We have an emergency fund. For people trying to get on a budget or make a change in their spending habits, going to cash is my first suggestion. Just because you pull cash out doesn't mean you have to carry it all with you at all times.

Marie said...

We use a debit card, but the credit cards have been gone for a year (although I confess we've kept an account open "just in case" -- I often wonder if they'd review our account if we ever called and asked for replacement cards).

There really is a huge difference in how you feel when you don't have credit cards. We've had times when we have used and paid off and times we've run a balance and paid off at the end of the year. Credit cards have never been a source of apparent stress to us. But this past year has been very, very nice. There's just something about knowing that you are always using your own money that makes you feel more secure in life in general.

JMB said...

My motto for budgeting is that it has to be easy to work for the long haul. That doesn't mean it has to be painless, but easy. We have 3 checking accounts (all free!). Paycheck goes into one. I transfer $ to my account for household expenditures (food, miscellaneous, school stuff for kids) and transfer "petty cash" into dh's account. We do usually spend it down to zero by end of two weeks, but I know exactly how much I have to spend. Incidentally, now that I stopped shopping at Costco and Target I have more $ left over. Now I just buy what I need when I need it, and I don't stock up on anything. It's so much easier for me to just worry about the particular day's need, not worrying about the future needs. So if chicken breasts are on sale and I don't feel like making anything requiring those breasts for the next few days I don't buy them. It's working out great.

Joe Magarac said...

Anyone who listens to Dave Ramsey and/or uses an envelope-style budgeting system should consider getting the YNAB budgeting software. It is way, way better than Quicken or anything else. My family started using it in 2008 and we could not be happier: it helps us stay within our income, plan for irregular expenses, put money away for the future, and obtain peace of mind.

I don't get anything from YNAB for posting this comment. I just wanted to share it with you because it seems like it would suit you pretty well.