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In my 2008 Financial Goals, my first item listed is creating a cash budget. Sometimes people call this envelope budgeting. Although cash budgeting is often considered budgeting for those without spending control or budgeting for people in debt. I disagree. My wife disagrees even stronger. We earn a reasonable income. We have never been out of control in our family spending. Although we would occasionally run up a credit card balance, it has never been unmanageable.

2008 Financial Goals: Envelope Budgeting
We are not in need of money, but we are in need of a budget — an easy budget. For us, cash budgeting seems like the right path. We sat down and budgeted approximately what we think that we will spend each month in several categories:

• Gasoline = $500 - That is a large sum of money, but my wife has a long commute for her work so it is not unreasonable.
• Clothes - $250 per month
• Home and Car repair = $100 per month
• Groceries = $600 per month
• Entertainment and Lunches = $450 - lunches and Entertainment may seem odd to budget together, but we see it as if we spend less on lunches there is more to spend on entertainment.

You probably notice many regular expenses are missing from the cash budget. Well, in reality, I we decided on what is a hybrid cash budget. The idea is to use cash for the items that we tend to spend without thinking and where many small purchases add up significantly. Plus, the home and car repair envelope is an attempt to accrue some money for irregular expenses. I think that we may have under budgeted that category, so it may require some readjustment during the year. Other expenses are useless to budget in cash such as cable or the cell phone. They are the same every month, so I am paying certain bills directly from my checking account with online bill pay. Medical expenses are not included because they are accrued through a flexible spending account.

Why Cash Budgeting?
We are using an envelope system to track expenses for each month and control unnecessary spending. We previously did not keep a budget, but decided to do so because we believed that we had some unnecessary spending leaks. We had tried electronic budgeting (using Quicken / Microsoft Money) but it failed several times for various reasons, but I might have done better if I had seen these instructions. The problems I saw with typical Quicken tracking were:

• Quicken was time consuming to set up when you have a more than basic situation. We have a small LLC, several accounts, a few loans, and credit cards.
• Quicken was time consuming to maintain. It had a difficult time learning several categories of spending. I found myself constantly telling it what to classify expenses from the same merchant that I had already classified. (I tried multiple versions including 2007. Maybe the problem is my bank, but the software should be smarter.
• Quicken encourages tracking net worth is not as important as most people believe. Tracking income versus expense versus saving is most important.
• Tracking cash in Quicken is still manual.
• My wife hated using a software program and not having some money in cash.

Why is tracking your net worth not all that important? Net Worth takes into account many factors that you have no control over such as the stock market. You have much more control over your income, spending, and savings. An occasional net worth check is good, but only to know if you need to adjust your savings. I only do a net worth check on my various accounts and a rough home value. I can calculate it anytime in five minutes, but why bother checking more than quarterly?

The last point about my wife is important. You must find a solution that you can agree upon with any others with a stake in the budgeting process. My wife hated the detailed tracking. There were a few reasons, but one was that we ruined a few surprise gifts by putting everything on the checking card. For example, once she purchased me a gift during the day several days before my birthday. She planned to give it to me after work so that I would not find the expense in online banking first ruining the surprise. Well, surprise! I checked online banking at lunch and called her to ensure that our checking card had not been stolen because it was an unusual purchase. Now that she can shave a bit of money off the entertainment cash for something like this, there is no chance of a spoiled surprise. There was probably another possible compromise options available, but this is where we landed.

Good things about Cash Budgeting

• Provides control for spending.
• Easy to understand.
• Does not require tracking of taxes, investments, etc. to spend less.

Cash Budgeting still requires:

• Discipline and self control.
• A plan and a budget by category.
• Detailed tracking if you must take from one category to pay for another. For example, we paid more than budgeted for car expenses

Problems with Cash Budgeting

• You must trust each other (and your kids) because cash is difficult to track if you are not careful.
• Cash is easy for some people to spend, so you may overrun your budget quickly.
• If you use it for variable expenses, such as home/car repairs you must have the discipline to allow an envelope to accumulate cash.

There is one finance post I found in the past few months agreeing with cash budgeting, but was implemented as result of spending $1,400 per month on food! Wow!

Late January Progress Check
To check my progress, I opened up the envelopes and we have quite a bit of money left over for the month, but not in the categories that I would expect to roll over each month such as clothes and house repairs. I am waiting to post the full annual budget (including the categories paid out of checking) because January has not been kind to my family. I feel almost like it is bad luck to publish with several days left in the month, but we have already experienced two emergency room visits and one car wreck. Plus, my car suffered a failure that could not be ignored — the oil pressure gauge quit working. The budget is in a wreck so thank goodness for the emergency fund.

Subscribe to the feed to see how we handle it and if we can stick with cash budgeting.

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