Discretionary money, or money that you spend at your discretion, is very often the downfall of budgets and kings. It is the money that you spend at a whim on clothing, or groceries, or a latte, on eating out or gifts for people, that many times will kill your budget. So, how do you manage that money in a way that it won’t destroy what you are trying to establish in your budget? I am so glad you asked 🙂 The following is my favorite plan for discretionary money and I hope it will help you to tame your spending beast as well.
One of the questions I get so often is “How do you keep track of your grocery money?” It is probably about groceries because most of my friends are Moms and staying in the budget with groceries is a huge part of our world. Grocery money, Gas money, Entertainment, Gifts, Free money, and just whatever categories you have in your budget that you don’t automatically pay as a bill, are really the most challenging thing about budgeting and the areas that most people overspend the most on. I consider these categories as discretionary spending, because it is money that you spend all throughout the month at your discretion. So what is the best plan for staying in budget and handling this money?
Well the truth is there is not one answer for all people in how to handle this money. Basically there are three methods for discretionary spending: cash, credit card, or bankcard. Or you can even use a combination of the methods. It really is about finding the system that works the best for you. For some people, carrying cash is scary and they would prefer to use a credit card. For others, spending on credit cards has gotten them into serious financial trouble and they absolutely need the boundaries of a cash system. And others prefer to use their debit card for everything so that they only spend the money that they have, but don’t have to carry cash. Using a bankcard also forces them to keep a careful record of what they are spending so that they do not overdraw on their account. For me, the system that works the best is a combination of cash in envelopes (the envelope system) and credit cards. I am going to go into the envelope system in detail for you today, because even if it is not your method of choice, all of us need to pull the reigns in on our spending at some point and the envelope system is an excellent way to bring you back on budget. Then in tomorrow’s blog I will write about how to manage discretionary spending on credit cards.
So, you haven’t had cash in your wallet in years due to the magic of the plastic card… and your question is, “How does this paper money even work?” Well, you might love it and you might hate it, but it will definitely work to keep you on budget. It is also a great opportunity to really get a feel of what you are spending each month. If you will notice on my budgeting plan (click here to view it and here to download it), I have a space between bills and what I consider discretionary spending. This helps me to separate it from those that I pay on bill paying day twice a month. For me, this is what I draw in cash when I make by bank deposit twice a month. I take $x.00 for groceries, entertainment, gifts, gas money, etc and then I have little bank envelopes that I have written groceries, entertainment… on and I divide up the money into it’s designated categories. Those little bank envelopes fit easily into my wallet and they really make it so easy to track your spending. When the entertainment envelope is empty, we skip going out to the movie. You can physically see what you are spending. I also tend to draw the money in large bills. It just seems a lot easier to wastefully spend $1, $5, $10 bills than it is to spend $100’s.
If you are nervous about carrying that much cash, then it might work for you to take the money out of your wallet and leave it in a secure place in your home. Then take out the cash you might need before you leave home and put it into your wallet. However, if this is your plan, have two sets of envelopes, because if you just take a $20 bill out of grocery money and stick it into your wallet, it is so easy to forget where you got it from and then just feel like “Oh well” and just spend it. The whole idea is to track your spending. If you get caught out with no money, you can use your card to pay for it, but then write the amount on your printed budget that you carry in your wallet or put the receipt into the appropriate envelope and immediately when you get home, put the cash into a “to be deposited” envelope to pay for that purchase. That way when you go to pay your credit card, you simply deposit your cash from that envelope and it should be exactly what you need to pay for what is on your card. Remember, the money to pay your credit card has to come from somewhere and the envelope system just lets you know exactly where it is coming from.
What I love about the envelope system is that I don’t have to keep track of every single purchase. We just buy groceries and gas and even entertainment and we know what we have in the envelopes and we can just relax and not constantly worry if we are going over budget or where the money is coming from. To me, it allows us to live on a budget, but not have to constantly monitor and track our budget. The envelope system does it for us.
It also makes it really fun when I get a great deal on diapers and spend less in “baby money”, because the cash left at the next bill pay period can go to something fun, like a “day to buy something” for my kids, or an extra date night for my husband and I. However if you save a significant amount in a category, then I would suggest maybe adjusting your budget and putting that extra money to a purpose like increasing your savings, or financing a dream, or putting extra toward debt. What you do with your money is up to you (and your spouse if you have one), but the key is just to be purposeful with that money. If you decide to just have fun with it, then go ahead and spend your $20 on a movie, because it will just motivate you for next month to come in under budget again.
Now if you are married, the envelope system needs to be negotiated. The way Matt and I handle it is we divide the money up. I keep the grocery money because I do the shopping, the gift giving money (again because I do the shopping), baby money, and my clothing money. Then he keeps the entertainment money in his wallet because we like to be together when we spend it. That way we are making memories, having dates, or eating out as a family. He also keeps a portion of the gas money that he needs for his car. However, Matt doesn’t like to have to go in to pay so he will take his cash and load a free gas card with his money, and then uses that to pay at the pump. He has to always go to the same kind of gas station, but he does that anyway so this works for him. So in his wallet he has his “free” money, his gas card, entertainment money, and his clothing money, which he can spend on clothes or whatever. What has worked for him is a version of the envelope system. He will use paper clips and sticky notes, or even just keep the money in separate sections of his wallet. For instance, he will fold his clothing money and put it behind a picture just because it helps him to purposeful with it and not to just spend it on a whim. There is a way to make this work, and if you are trying to come out of a freefall of spending and bad financial habits, this may be exactly the reality check you need. It does take some self-control when your envelope is empty and a “desire” comes up, but this is actually really good for you to realize that it is giving in in these moments that has sabotaged you in the past and kept your finances in disarray and debt. Just submit that desire to the Holy Spirit and go on about your day. 🙂 I can feel you smiling at me like, “Yeah right.” It is never fun to reign your flesh back in, but it is so worth it!
So, giive the cash/envelope system a try. Like I said earlier, you may hate it, you may love it, it will definitely challenge you, but it could also change your financial world around. It is a great “litmus test” to see if what you have allotted for groceries (for instance) is actually livable for you family. It really will reveal a lot about your spending habits, but if you actually let the cash/envelope system become the habit, it will also revolutionize and simplify your finances and help to change your spending habits.
Money is spent easily, it goes quickly and there is no simple solution to managing it except to manage it. And just like water in your hand that so easily flows between your fingers, the only way to keep money in your hand is to find a way to contain it. The envelope system is simply a system of containers for your resources, yet it is also a great way to know that although you may be out of money in one particular envelope, you will never be empty handed in your finances again.