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Let's face it -- budgeting money in today's card-flashing times can be difficult to master. Having to come up with a budget that actually works is hard enough to do, but it's especially challenging when debit and credit cards allow you to transfer money out of yoursavings accountwithout even seeing or touching it.
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When the advances of online banking and electronic payments start breaking apart your finances, something has to change.Dave Ramsey, personal finance expert and creator of the Financial Peace University, advocates a budgeting method that was used in simpler times: theenvelope system.
What is the Dave Ramsey envelope system?From the get-go, the idea that using something so outdated as a paper envelope (email is so much more efficient) to stay within your budget seems a bit far-fetched and simply too easy -- but that's exactly the point.Saving moneyhasto be easy in order to stick with it and adopt the habit long term.
The envelope system literally uses labeled envelopes as a way of allocating various budgets throughout the month. For example, one envelope is labeled "Groceries," while another envelope is labeled "Gas," and so on. There is no limit to the number of budgets, or envelopes, you can have.
Once you've determined what your budget categories are, it's time to crunch some hard numbers and establish how much physical cash to put into each. This amount is the only fund you can use for the entire month; once you run out of cash, there's no using a debit or credit card as a back up.
Dave Ramsey explains thatusing cash onlywhen making purchases triggers a pain response in your mind that naturally deters you from overspending.
"There's something psychological about spending cash that hurts more than swiping a piece of plastic," Ramsey said. It might be a bit unnerving to know that you're deliberately participating in an act that is meant to be painful, but the point is to condition yourself to have greater awareness of what it really means to spend money.
4 ways to find success using the envelope systemLike any other budgeting strategy, Dave Ramsey's envelope system requires you to set yourself up for success from day one to see the savings results you want. Here are a few tipsto help you stay on track using cash only with the envelope system:
1. Account for every pennyThe most boring part of any process is often the most important. When determining how much to allow in each budget, accounting for every expenditure is essential. What's also important is to calculate how much you'd need in each budget by adding up how much you've spent in the past on bills, such as utilities and groceries -- to the penny. Rough estimations from the depths of your memory will only harm your ability to budget accurately.
2. Budget realisticallyYou might have big savings goals, but being unrealistic with each budget will be your own worst enemy. If you know you spend $200 on gas every month, which primarily goes toward your daily work commute, why set your budget to $100? In this particular scenario, you've already set yourself up for failure since spending $200 to get to work is non-negotiable in most cases (unless your employer is in walking distance or you have the opportunity to carpool).
3. Leave plastic cards at homeWhen going out on supermarket runs or to a restaurant, a key component to saving money with the envelope system is to leave any debit cards or credit cards at home. Doing so prevents you from letting your willpower buckle at checkout.
If you absolutely must pay for something urgent and unexpected that's beyond your budget, you can adjust how you've divided up your money by pulling money from a more flexible budget, like groceries. At the end of the month, you would have still kept within your total spending budget anyway.
4. Let yourself have funToo much restriction for the sake of saving money can set yourself up for failure with theDave Ramseyenvelope system. For this reason, give yourself permission to set up an entertainment or "weekend" budget for a few fun activities you can indulge in throughout the month. Soon enough, you won't even feel like you're wanting when it comes expenses like treating yourself to a night out with friends.
This article originally appeared on GOBankingRates.
The article Why Dave Ramseys Cash-Only Policy Is Genius for Saving Money originally appeared on Fool.com.
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