The Envelope System

I love personal finance. My first financial mentor was John Commuta, and am currently tutored by Dave Ramsey 3 mornings a week as I deliver the paper. I also read fivecentnickel and get some good stuff from him. Stephanie and I are around 1/4 million in debt. We aren't good targets for identity thieves. A couple months ago I worked out a very detailed and disciplined plan to be completely debt free in less than 11 years "on just the money we already make". (Commuta uses that phrase in his ads all the time) Hopefully, our income will increase and that number will shrink.

The problem is that my plan depends on Stephanie and I sticking to our budget. It is tight but realistic. Our dedication vacillates constantly because there are always special circumstances that justify fudging the budget just a bit. Those little exceptions in multiple budget categories really add up. According to our budget we are supposed to have around $800 to add to our smallest debt every month (up from $400 because we paid off the Honda! YES!). This month we barely paid our bills.

We were out of credit card debt quite a few months ago, but we funnel everything we can through our discover card in order to maximize our cashback bonus. We have not carried a balance in months. But, Ramsey confronts this mindset often on his show and insists that statistics show that people spend more when they use a credit card than they do with with cash or debit. Although I could not deny the stat, I have insisted that we budget well enough and track our expenses well enough that the credit card does not influence the amount we spend. Today, I publicly confess that I was wrong.

So, with hardly any resistance Stephanie agreed to the change. Today, my friend Walter passively convinced me to go the extra mile and convert to an all cash system. The aforementioned statistic further states that people spend even less with cash than they do with debit. So, I just emailed Stephanie and informed her that I want to switch to the envelope system. I remember my brother and his wife reading Larry Burkett and using this system as a result in their early married life. Here is how it works.

For all expenditures that are discretionary like groceries, entertainment, recreation, clothing, hobbies, dining out, and even gasoline, we take the budgeted amount of money at the beginning of the month and place it in appropriate envelopes. Throughout the month when we want something, we go to the envelope and use the cash for ALL purchases. When the cash is gone, guess what-- you are done. The system is beautifully simple, but certainly the best way for all but the extremely disciplined.

I am nervous but excited, because I know that the end result will be totally worth it.

Personal Finance 101

A small passion of mine is managing our personal finances.  I did not happen upone this obsession like I did the rest of them.  My story, I imagine, is like many others.  After many years of overdraft charges and thinking to myself at tax time, "I made that much money?  Where on earth did all of it go?", something finally snapped.  So, for the past couple of years I have managed every cent with Quicken.  I love it.  I can print reports that detail every single time we went out to eat, produce graphs of utility bills, see how gas prices influence out fuel expenditures and more.

Some people keep lots of secrets about their finances, but they are what they are.  I can state ours boldly with little threat of enticing identity thieves, that is for sure.  We are currently in debt to the tune of about a quarter of a million.  If we were not in so much control of our money this figure would terrify me.  But, thanks (and no thanks; I'll explain later) to John Commuta and some intense spreadsheets, I know we can be TOTALLY debt free in 11.3 years with "just the money we already make".  This is great news, especially since we plan on making more eventually!

The one way John steered us wrong is in prioritizing which debts to pay first.  According to Commuta (and Dave Ramsey I hear), you are to pay off smallest balances first thus increasing your "accelerator margin" or "debt snowball" fastest.  I spent half an evening playing out both scenarios and proved that focusing on the highest interest rate first is in fact the best strategy.  I shouldn't be surprised.

Anyway, there is really nothing to say about our plan beyond what is written a thousand other places.  All I know is that I am excited and we are determined and I know that you can do it too!