Tuesday, February 4, 2014

The Envelope System Revisited

Back in the day, before rural electrification was an accomplished fact; before every home had a crank telephone hanging on the wall; there was a simple foolproof family budgeting method, the envelope system. Not everybody had a checking account. No one had a credit card or a debit card. They hadn’t even been invented at that point in time. Electronic debiting on the Internet didn’t even exist in science fiction. Most people paid for just about everything with cash. Vestigial remains of this simpler time can still be found in American churches. The numbered offering envelope made perfect sense when everyone used cash. The church treasurer could tell the difference between the Homer Smith’s five dollar bill and the Barney White’s five dollar bill. It isn’t all that many years ago that Henry Ford shocked the world with his generosity by offering his employees $5.00 for a days work. A five dollar bill would have probably been a special one time offering.

With so many expenses, credit cards, utilities, car payments, mortgage payments, taxes, stores, and service stations an old fashioned cash envelope system doesn’t make a lot of sense any more; at least most of the time. However, it still makes a lot of sense in a spread sheet or subaccounts offered by banks like ING. Every time a paycheck is electronically deposited (How many years has it been since your boss came around on Friday afternoon with your paycheck in his hand?) husband and wife sit down at the family computer to divide that money up into electronic envelopes before the first penny is spent. Metaphorically speaking, in this electronic system there is an envelope for credit cards, an envelope for utilities, an envelope for food, the mortgage payment, and something for that silly little numbered envelope, if your church still has such a thing. Really the formal family budget is nothing more than an elaborate envelope system on pieces of paper or contained in electronic spread sheets.

This system is a nearly idiot-proof method to avoid debt. When cash money comes into a household it is placed in an envelope. Money for food always and only comes from the envelope marked food. When that envelope is empty, no more money is spent on food until the next paycheck arrives. American used to live like that, really.

There are categories of spending that I believe still merit an envelope, problematic discretionary expenditures. While cigarettes, beer at the local tavern, and women’s shoes are obvious candidates for an envelope, there is one overwhelmingly pervasive problem area for the modern American family that might well require an actual factual envelope containing actual factual cash. Restaurants! Almost everyone I know (including me) admits that they spend too much money in restaurants. Young single folks alone in a new city find community and entertainment in bars and restaurants with their friends. Married couples with two jobs, two kids, and no free time live on fast food. Many of us, see sharing a well prepared meal with friends at a nice restaurant as a reward we deserve for all our hard work. For most of my career the cafeteria offered better food than a brown bag at prices I was willing to pay. Sometimes I felt guilty about this practice, but it was just too easy to walk over to the cafeteria for a hot meal.

Go ahead, the next time some money comes into your house, count out some real paper money. Put it into an envelope marked restaurants and fast food. If you buy a burger at a fast food joint, a doughnut and a cup of coffee at a convenience store, or sit down to nice breakfast with an old friend, pay for it with money taken from that envelope. When the envelope is empty, that’s it. No more meals or even a cup coffee brewed outside the home until the next infusion of cash.

One more “envelope,” this time an electronic envelope. Back in the day, banks offered something called a Christmas Club Account. The customer authorized the bank to move a predetermined weekly amount from their regular account to a special account for Christmas. The customers didn’t like them because they paid little or no interest. Also once the money was in the Christmas Club Account it could not be used for any other purpose. If any money was withdrawn before the specified date, the customer was charged a fee. The banks didn’t like them because in those days before the computer, the cost of accounting for these small deposits simply was not worth the effort. This common sense approach to a common problem was replaced with the credit card. Not a good solution. In our marriage, Christmas generated our ugliest money arguments. A lot of nasty words and hurt feelings could have been avoided if we opened a little bank account, agreeing to deposit some weekly or monthly amount that was to be spent on Christmas.

The point of this exercise is not to deprive you of a good thing. The key is mindfulness. It is your money. Spend it as you wish. If you want to live in a cold water flat, but want to complement meals from the finest restaurants in your city with $100 bottles of wine, that is your business. If that is what makes you happy, go for it. If you are autopilot, spending your money without thought, you are going to run up debt without ever really, consciously, enjoying the fruits of your labors.

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