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.

No More Debt, in theory and in practice

A few weeks ago Darwin's favorite economics podcast, EconTalk, featured Megan McArdle, a libertarian blogger he reads frequently. The topic was Debt and Self-Restraint, and a good portion of the podcast was devoted to McArdle discussing how she'd worked out of debt by establishing a budget, using cash instead of credit cards, and paying off loans as fast as possible. Of course these are pretty basic principles, McArdle allowed, but "pretty basic" does not translate into "universally followed". Even we, who consider ourselves basically financially savvy, found ourselves writhing guiltily as we pondered our lack of firm budget and our reliance on credit cards as our normal financial tool.

McArdle had been inspired to financial self-control while researching Dave Ramsey for an article she wrote for The Atlantic. We had never heard of Dave Ramsey, but it seems he's a financial guru with a radio following of 3 million listeners. So we bought Ramsey's latest book The Total Money Makeover (on Amazon, using a credit card), and read and discussed it over the holidays. In the book Ramsey says that people tell him that his book was the first one they'd read in ten years, and (to be honest) it does read rather at that level, but his process in a nutshell is:

1. Quit using credit cards
2. Make a budget in which every last dollar of income is accounted for.
3. Save $1000 as an emergency fund.
4. Start paying down debt (except your mortgage) with every extra dollar, starting with your smallest debt. Pay the minimum on all other debts.
5. As you pay off a debt, roll that money into paying off your next smallest debt.
6. Once your debt is paid, save a larger emergency cushion, perhaps equal to three months income.
7. Pay off your mortgage at an accelerated rate.
8. Invest, Give, and Have Some Fun with your money.

Our debt, we thought, lay in four categories: Student Loans, Mortgage, The Van, and The Dryer. In an act of self-delusion, perhaps, we never considered ourselves in credit card debt because we pay off our card each month. But, as we contemplated moving to an all-cash system, we had to confront what we knew intellectually but hadn't considered practically: that, if you pay your card on the due date each month, you're really two months in arrears. You have the month you're currently spending on, and the previous month for which you have the statement and the bill. This works out fine if you intend to keep paying your statement balance every month, but if (as we have for years) you do all your spending on the card, then when you decide that you want to switch to an all-cash economy you're faced with, well, debt.

So. Today is the first payday of the new year, and it's the day for the switch. We plan to follow Ramsey's basic outline, except that we're not going to pay down the smallest debt (the dryer -- which is at zero interest for another 8 months anyway) first. First, we're going to get out of credit card debt.

UPDATE: (A word from Darwin) The really tough thing, contemplating all this, has been accepting the idea of ceasing to use the credit card, going to an all cash budget, and then paying off the credit card over a series of months as a debt. I don't think I'd realized up until I contemplated this how much of my pride is wrapped up in the words "I don't carry a balance." Sure, at several points in our marriage, after a major expense (giving birth, etc.) we'd carried a credit card balance for a couple months, but in each case we'd budged very aggressively until we were back to paying off the entire credit card every month. I drew a lot of pride and satisfaction from thinking (when I read about how the average household carried 10K+ in credit card debt) "But we don't have a problem, we don't carry over a balance." thus putting ourselves in the group who cash in credit card rewards (in our case, we get Amazon gift certificates equal to 1% of our purchases) while never paying interest or fees.

The kicker, however, was realizing that if we ever had a major financial emergency (like if I lost my job) we'd have between one and two months complete spending already out there. Suddenly we'd be carrying a pretty substantial balance. And so we gritted our teeth and made the decision to step off the carousel voluntarily now, rather than finding ourselves pushed off at a time when it would represent a major crisis rather than a budgeting choice.