3 Budgeting Methods To Help You Stick With Your Budget
1. Cash Budgeting Method
How Does The All Cash Budgeting Method Work?
The all cash budgeting method is simple and straightforward. Here’s essentially how it works.
- You get paid.
- You convert the entire amount of the check to cash.
- Pay all of your bills in cash.
- You set aside any cash that you want to save in a semi-safe place (the proverbial jar in the closet).
- With your remaining cash you cover your day-to-day living expenses. If you run out of cash, you quit spending.
Who Is The All Cash Budgeting Method Best Suited For?
As appealing as the all cash budgeting method is in terms of its simplicity, it’s only a practical money management solution for a limited number of regular people. Why? For one thing, it’s a significant (not to mention stressful) issue to keep cash – especially large amounts of cash – safe and secure. Also, while you might be able to walk down to the property manager’s office to pay your rent in cash, it’s much more of a pain to do so for things such as your utilities and phone bill. Despite its drawbacks, the all cash budgeting method can be useful for the following categories of people.
- Young kids living at home.
- Students away from home whose primary expenses are largely covered for them (room, board, insurance, etc.).
- Those who are living with relatives or friends due to age or personal hardships.
- Those with a lack of understanding and/or a great fear of banks and the financial system in general.
- Those who have lost checking account privileges by doing things such as bouncing checks or continuously over-drafting. It can also be from not settling up with the bank, either due to excess, abuse, mismanagement, or a lack of understanding.
The all cash budget method of budgeting is also used by the following categories of people, who I would not broadly characterize as “regular people!”
- Illegal immigrants or others who do not want to provide the necessary identification to open a bank account.
- Criminals who do not want their identity or whereabouts to be traced.
- Anyone else who wants to remain anonymous for whatever reason.
Is the all cash budget right for you? Check out our article on The Budgeting Cash Envelope System.
2. Budgeting Methods Using Credit & Debit Cards
Introduction Of Budgeting Methods Using Debit Cards
Check and debit card budgeting methods are refinements of the Budgeting Cash Envelope System. When I say “refinements” in this case, I don’t mean that a cash based budgeting system cannot work or be an effective budgeting method for some people, because it absolutely can. However, cash based budgeting systems do have some notable shortcomings which I discuss in more detail below, and the use of checks and/or a debit card is intended to shore up those weaknesses while still maintaining the integrity of the budget process. As a means to illustrate how checking and debit card budgeting methods work, assume that your financial situation for the month is as follows.
What this illustration shows is that after you pay all of your bills, you have $1,000 left to cover your day-to-day living expenses for the month. It’s important to clarify before going any further that there are distinct advantages and disadvantages of making payments with checks, debit cards, and cash, and to learn about that in more detail you can see the article, “Comparing Paying with Cash, Checks and Debit Cards.” However, for purposes of this budget-related article, I am going to treat the use of checks and debit cards as essentially the same, because both payment methods draw funds directly from your checking account each time you make a purchase.
The Advantages Of A Debit Card Vs. Cash Based Budgeting Methods
There are distinct advantages to managing your budget with checks and/or a debit card as opposed to cash.
- Convenience and flexibility – If all you have is cash and you’re out and about then you’re your spending is limited to the money you have in your purse or wallet. However, if you’ve got a debit card or a checkbook then you have immediate access to all of the money in your budget (which is $1,000 in our example).
- Security – If your checkbook or debit card is lost or stolen there are steps you can take to limit your risk of loss, but if cash is lost or stolen then it’s likely gone forever.
- Better record keeping – When you make purchases with cash you only have your receipt from the transaction, and in some cases you may have no receipt at all (paying a babysitter, for example). On the other hand, when you pay with a check or debit card you not only have the receipt from the transaction, but you have other records as well (entries on your bank statement or, in the case of checks, check carbons).
The Disadvantages Of A Debit Card Vs. Cash Based Budgeting Methods
While there are certainly advantages to managing your budget with checks and/or a debit card, there are drawbacks as well.
1. Discipline – While I don’t pretend to know all of the psychological reasons why, people tend to take spending cash more seriously than writing checks or handing over a debit card. Somehow spending cash “hurts” more, or makes the cost of a transaction more “real.” As a result, some people have an easier time respecting and staying within their budget using a cash based budgeting method as opposed to a check/debit card based budgeting methods.
2. Math Errors – If you make a math error in tracking your budget while using a checking or debit card money budgeting method there is a real possibility you could overspend, thinking you have more money in your account than you actually do. With a cash based system it’s unlikely you’ll go long thinking you have more money than you do. For example, you might think you have $100 of cash left, but if you open your purse or wallet and you only have $60 then that’s it – you’ve only got $60. Granted you may not be able to remember where the missing $40 went (which can be frustrating), but after counting the money in your hands there will be no doubt how much you have to work (which can provide a sense of certainty).
“Remember Time Is Money. Simplifying Your Budget Will Give You A Better Chance Of Sticking With It!”
3. Losing Receipts – When using debit cards in particular, it’s not difficult at all to lose track of a receipt, and thus forget to account for it in your budget. For example, if you get gas with a debit card and fail to take the receipt then it’s very likely you’ll forget to deduct the purchase from your budget. As with math errors, if you miss recording a transaction such as this then you’ll think you have more money to spend than you actually do, which will put you in danger of blowing your budget.
4. More Complex Record-Keeping – While it’s true that using checks and debit cards technically provides you with better record-keeping, it also makes your record-keeping more complex. Think about it, if you convert the remaining $1,000 in your account for day-to-day living expenses into cash then you will have very few transactions to account for on your bank statement when you balance your checkbook. On the other hand, each check and debit card transaction will hit your bank statement, and all of those transactions can be difficult to reconcile unless you’re diligent and organized.
Combining The Debit Card and Cash Based Budgeting Methods
It’s important to note that the check/debit card method of budgeting and the use of cash basis budgeting are not mutually exclusive. In fact, you can combine the two methods in a myriad of ways, and doing so can provide you with a lot of flexibility and can be tremendously effective. To illustrate, in our example you have $1,000 to manage your day-to-day expenses for the month. That being the case, you might elect to take $100 in cash to spend on miscellaneous things over the course of the month, leaving $900 in your account to cover checking and debit card transactions. Thus, as you go through the month, you have the flexibility to pay for things with a check, debit card, or cash as you see fit. Again, that’s just an example.
There are almost limitless ways you can combine checking and debit card based budgeting with cash based budgeting to manage your finances. The important thing is to develop a system that meets your needs, that you’re comfortable with, and that best enables you to live within your means.
Related article “Cash Budgeting Method Explained“
3. Cash Envelope System
How The Budgeting Cash Envelope System Works
The budgeting cash envelope budgeting system is a refinement of the All Cash Budgeting Method. In other words, instead of paying for everything with cash, the basic philosophy of the budgeting cash envelope system is pay bills using a checking account, but to use cash to pay for everything else. Here is an illustration of how it works.
What this illustration shows is that you used checks to pay all of your bills, and then you converted the remaining $1,000 of your paycheck in cash. So what are you going to do with all of that cash? How do you properly manage it? That’s where the envelope system comes in. What it means is splitting up your cash and putting it in separate envelopes, with each envelope representing the amount of money you can spend within a certain time period or on a certain category of expense.
And how do you decide how to split up your cash? Of course it should be according to your needs, preferences, goals and personality. It’s also vitally important that you split up your cash in a way that works best for you, with “working best” being defined as the system you’re most likely to follow to live within your means (which in this example means not spending more than your $1,000 of cash until your next paycheck). With that flexibility in mind, there are 4 main schools of thought on how to split up your cash when applying the budgeting cash envelope system.
Method #1 – Divide You Cash Into Time Periods “Weekly Method”
Assuming there were 4 weeks in a month, if you wanted to divide your cash into time periods then you would put $250 in 4 separate envelopes labeled “Week 1” through “Week 4”. This budgeting cash envelope system would then use the $250 for week 1 to make all of your day-to-day purchase: groceries, gas, entertainment, etc. If you elect to use this “Weekly Method” then you need to understand that spending needs for different weeks could be quite different. For example, one week might be heavy on groceries, and another might be heavy on gas or other expenses. Either way, if you maintain your discipline then the idea is that the week-to-week highs and the lows should average out.
But what if you happen to have a week that requires heavy spending for one reason or another? While not ideal, you would either drastically cut your spending or, if necessary, you would borrow cash from the next week’s envelope to make it through. On the flip side, what if you had a week with exceptionally light spending? Rather than go out and blow the money, I would suggest putting in an additional envelope marked “Extra.” That way you’ll have an additional source of cash to draw from if another week’s spending runs high. Finally, if you end the month with any cash remaining then you’re in the enviable position of having extra money that you can either save or spend.
Method #2 – Divide Your Cash Into Categories of Spending “Category Method”
Another budgeting cash envelope system is an alternative to the Weekly Method of organizing your cash envelopes, you could use the “Category Method.” You do this by creating separate envelopes for groceries, gas, fun/entertainment, savings and any other categories that make sense to you. As you go through the month you draw cash from the appropriate envelope depending on what you’re spending money on. If run out of money in a particular envelope then ideally you shouldn’t spend any more money on that category. However, if it’s urgent (you need gas so that you can get to work) then you can take some cash from another envelope where you might have some extra (such as groceries, but now you might have to forego the chips and ice cream you wanted).
The upside of the Category Method is that it’s easier to predict how much money you’ll spend on various categories of expenses than it is to figure out how much you’ll spend in a given week. For example, it’s much easier to estimate how much cash you’ll need for gas in total than it is to determine how much cash you might need for week 3 as opposed to week 4. On the other hand, the Category Method can be difficult to apply in practice.
“Using Cash Into Categories Of Spending Takes Time To Get Use To, But It Is A Great Budgeting Cash Envelope System!”
To illustrate, say you’re going to the movies, but you’ve got to get some gas on the way, and you’re going to pick up some milk on the way home. How are you going to handle that in the context of the Category Method? Are you going to take your “Gas,” “Groceries,” and “Fun” envelops with you, and then pay for each with separate money? Or are you going to take what you estimate what you need from each envelope and carry a combined amount of cash. Do you know what category the cash that might already in your purse or wallet belongs to? In which envelope(s) will you put any change you might have left over, or will it just stay in your purse or wallet?
In summary, while the Category Method is conceptually sound, it can be difficult to develop and perfect a system that will keep your cash in various categories segregated. If this budgeting cash envelope system doesn’t sound right for you we have the lump sum method.
Method #3 – The “Lump Sum” Method
You might not want all of cash to be henpecked into specific categories of spending or artificially short time-frames. In other words, forget all this envelope stuff. The philosophy behind the Lump Sum Method is that you just want to know flat out how much money you have $800, how long it needs to last 1 month, and then be left alone to manage it as needed.
The appeal of the Lump Sum Method is that it conveys a sense of freedom “Wow, I have $1,000 of cash to spend however I want.”. On the other hand, the Lump Sum can convey a false sense of freedom that can get you into financial trouble. For example, let’s say that even if you’re very, very careful with your cash, essentially $700 will be needed over the course of the month for the very basics, such as food and gas.
If you lose sight of that and go out and the beginning of the month and blow $400 on “fun” just because you started out the month with big wad of cash, you’ll end up running out of money before the end of the month…even if you do nothing else fun or that you want to do (because you’ll only have $600 left, or $1,000 less $400, when you really need $700 at a bare minimum to cover real necessities such as groceries and transportation)!
My Observations Of The Budgeting Cash Envelope System Called The “Lump Sum” Method
In summary, my observation is that the Lump Sum Method can work very well with people that are highly disciplined with their money. By “highly disciplined” I mean “stand at attention for 3 hours in the rain without moving a muscle” type of disciplined. This budgeting cash envelop system is by far the most discipline of all methods that have been covered. On the other hand, if you have a single impulsive bone in your body when it comes to purchases “Hey, I wasn’t really looking to buy anything, but that seems like a good deal!”, then I would proceed very carefully before adopting the Lump Sum Method.
Method #4 – Combining The Budgeting Cash Envelope System Methods
In using the budgeting cash envelope system there’s no reason why you have to exclusively use any one of the above methods. Instead, you can combine them any way you see fit according preferences, personality and goals. For example, in thinking about how to split up your $1,000 you might decide to put $600 in an envelope marked “Groceries & Gas” and then divide the remaining $400 in 4 separate envelopes of $100 for weeks 1-4. That way you have money set aside that’s dedicated to necessities, and you have an extra $100 each week to take care of everything else. Again, that’s just an example; there’s no end to the combinations you can come up with in using the budgeting cash envelope system to meet your own customized needs and circumstances.