When my wife and I began living on cash, we used the envelope method to implement our budget. Separate envelopes were assigned to each budget category. The amount of cash specified in our budget for a particular expense was placed in the appropriate envelope each month. We paid for expenses with cash from the envelopes. The advantages of converting our budget to cash using envelopes were two-fold: 1. We became sensitized to the true value of money by using actual cash. 2. The envelope method required no record keeping.
Envelopes and cash could only take us so far
We recommend the use of the envelope method when beginning to live on cash. However, over time, as our budget became internalized and our balance sheet improved, the use of envelopes and actual cash became cumbersome and no longer suited our needs. Large amounts of cash had begun to accumulate in some of our deferred expense categories such as house maintenance and repairs, appliance replacement and repair, car repair, etc. We needed a way to deal with the building mountain of cash. The solution was to translate the envelopes into a paper-based system and use credit cards instead of actual cash to pay expenses. We chose to use credit cards rather than debit cards because of the advantages credit cards give us over the use of debit cards. See this blog post for details: Cash, Debit Card, or Credit Card: Pros and Cons, Part 3 of 3.
Set up a ledger
This approach does require some record keeping but it is simple to use. Assign a page of a spiral notebook to each expense category. Draw three vertical lines on the page about 1.75 inches apart to create columns. Repeat this until all expense categories have a page. Add pages for saving categories, as well. Leave a few blank pages between each expense and saving category. Now create one additional page for a Credit Card Payment account. See Figure 1 below.
Important Note: All money in your checking account should be assigned to either an expense or saving category. Therefore, your ledger should reflect your checking account. In other words, the total of the opening balances of your expense and saving categories in your notebook should equal the current balance in your checking account.
At the beginning of the month, enter the date and the dollar amount budgeted for each expense category at the top of the left most column of the assigned page. Note: If you have been using the envelope method and have account balances to carry forward, enter those balances first, then enter the current month’s allowance and add the two together to arrive at the current balance for that expense category. Make a deposit to your checking account of any money you have accumulated in your envelopes. Now you are ready to spend. See Figure 2 below.
Use a credit card to pay for expenses. The best card for this purpose is one that is universally accepted, charges no annual fees, offers a grace period in which to pay the card balance before finance charges kick in, and offers rewards for using the card.
How to post credit card charges to the ledger
Here is how to post credit card charges: Enter the date and amount of the credit card charge in the relevant expense category under the last number in the column which should be the current balance for that expense category. Draw a line under the new entry and subtract it from the figure above it. Enter the result directly below the line you drew beneath the credit card charge. This is the new balance in that expense category. See Figure 3 below.
Now record the date and amount for the same credit card charge on the page set aside for the Credit Card Payment account. Make the entry at the top of the farthest left hand column on the page. For every credit card charge you will make two entries: one to an expense category and one to the Credit Card Payment account. Save credit card receipts by month in an envelope or file folder. See Figure 4 below.
If the credit card charge involved more than one expense category, distribute the charge among the relevant expense categories as described above. Then make an entry for the total amount of the charge in the Credit Card Payment account as outlined above.
As subsequent expenses are incurred, continue to post them to the relevant expense category and subtract from the current balance to keep a running balance for each expense category. See Figure 5 below.
Make the corresponding entries to the Credit Card Payment account for these charges. Add each entry to the current balance to keep a running balance for the amount owed on the credit card. See Figure 6 below.
How to reconcile your credit card statement
When you receive your credit card statement, reconcile it by comparing the charges on the statement with the amounts you posted to the Credit Card Payment account. When a charge on the statement matches a charge on the Credit Card Payment account, make a check mark next to the charge on the statement and another next to the corresponding entry on the Credit Card Payment account. Make sure all charges appearing on the statement have check marks beside them before you pay off the credit card. This assures that all of the charges on the statement are legitimate. Refer to the original credit card receipts, if necessary. Pay the entire balance before the due date by check, or if you pay online, by electronic transfer from your checking account. Enter the date and the amount of the payment below the current balance in the Credit Card Payment account, draw a line under the amount entered and subtract it from the current balance. Enter the result on the next line. This is the new balance owed on the credit card and reflects charges made after the billing cut off date for the credit card. See Figure 7 below.
Remember to subtract the credit card payment from your checking account balance in your check book.
To begin the next month, fund the expense and saving categories as before by entering the monthly allowance. Add this to the current balance to arrive at the new balance. Subtract charges from the proper expense category then add the charge to the Credit Card Payment account as you did the previous month. See Figure 8 below.
To determine the amount of money that can be spent in a particular expense category, just go to that page and check the current balance.
The total of the balances of the expense and saving categories, plus the Credit Card Payment account, should equal the balance in your checking account. It is a good idea to balance your ledger against your checking account in this way each month to confirm the accuracy of your expense category balances.
Advantages of a paper-based system using a credit card for payment
This method of implementing the budget has several advantages over using envelopes and actual cash:
- The cash stays in the bank until the credit card payment is made. If you have an interest bearing checking account, you will accrue additional interest by keeping the cash in the bank.
- Using the credit card and paying off the balance in a timely manner each month improves your credit standing. Good credit is valuable whether you intend to borrow money or not. It can have a positive effect when seeking employment, renting an apartment, purchasing insurance, etc.
- Using a credit card gives you the flexibility to take advantage of bargains that fall within your budget that you might otherwise have had to pass up due to a lack of cash in your pocket.
- You can earn one to five percent cash rewards or other incentives by using the credit card instead of cash to make purchases.
- Credit cards offer protections and benefits to cardholders such as extended warranties and buyer protection that the use of cash does not afford.
- Money accumulated month-to-month in your expense categories remains in the bank earning money provided that you have an interest bearing checking account.
- Finally, you enjoy the convenience of not having to calculate the proper denominations of money when getting cash for the envelopes.
Using credit cards in this way is the same as using cash provided you pay off the entire balance of your credit card in a timely manner each month. The convenience and extra money earned on the balance in your checking account and in rewards for using the credit card more than offset the drawback of having to do some simple record keeping.
Copyright 2014 K.C. Knouse
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages