Dave Ramsey Cash Envelope System Report Card

In August of last year, I blogged about a Modified Dave Ramsey Envelope System for managing your finances. I've been using it ever since then and I've had excellent results. In a nutshell, here's the plan.

First, I budgeted for all of my known costs. Mortgage, insurance, utilities (estimated), property taxes, averaged car repair per month, savings, school tuition for the kids and so forth. These were all of the items that were going to remain constant regardless of my monthly activities. It is crucial to note that savings was considered a fixed expense.

The remaining money from my paychecks was put into an envelope (an electronic one in my case) and was used to cover all variable expenses such as food, gas for the cars, clothes and so forth. Anything that wasn't explicitly budgeted came out of my remaining cash with no exceptions. That "no exceptions" rule proved crucial.

The last several months have taught me a great deal. First, I've learned to be even more frugal than before. As I've tracked the money in my "envelope" I've learned that every dollar counts. Here's why.

Say you earn $5000 per month. Does it make a difference if you save $1 on a purchase? Would it make a difference to you if you had brought home $5001 or $4999 instead? You'd hardly know the difference.

All of these are not created equal.
After taking out all of your fixed costs, say you're left with $400 each month out of your $5000. If you've got a big mortgage or major credit cards to pay off, that can happen. That $1 is heck of a lot more important now, isn't it? That concept of marginal utility is what makes Dave Ramsey's system work. A dollar is worth more to a poor person than it is to Bill Gates.

By removing your fixed costs and dealing only with what's left, you find yourself feeling much poorer than before. The math hasn't changed, but your perception of the world certainly has. That change in perception brings with it a change in spending habits.

The second thing I learned was why that "no exceptions" rule was important. When expensive times of the year come around, like Christmas or birthdays, your first impulse is to take these once-a-year purchases off budget. It's not like you're going to be buying gifts for your kids all the time. After all, that money you're saving can be stopped for one month to take care of the things the kids or spouse want, right?

Wrong.

Once you start taking things off budget, discipline breaks down and you can begin excusing all kinds of things. Remember, Man is not a rational animal, he is a rationalizing animal. As painful as it is, those gifts have to come out of your puny cash envelope. This one bit me in December. I had saved some money through the previous few months and thought I had enough to carry me through Christmas. Here's where my modifications to the Dave Ramsey system hurt me. Instead of using a real, live cash envelope, I used an Excel spreadsheet to track that budget item.

I got busy doing other things and stopped tracking my finances until after the Holidays. It was a classic blunder leading to a classic forehead-smacking moment when I sat down and tallied up the spending. Ouch! I was sorely tempted to give myself a one-time indulgence and write it off, but I decided not to. That was just too much of a slippery slope. Had I been using the real cash envelope, I would have known I was heading towards the rocks. Instead, I ended up in the red in my Excel spreadsheet and have had to really tighten the belt lately to drag myself back out.

That leads to the third lesson of the experiment. If you're not going to use a real envelope with cash in it for this budget, then you need to keep on top of it all the time. If you don't, the situation can get away from you.

The last lesson I learned was that none of this was painful at all. Quite to the contrary, I've thoroughly enjoyed it. I have financial peace and I've had a good time finding bargains. Thanks to things like Craig's List, I'm still able to go out and buy some pretty nice stuff. Thanks to my Dave Ramsey system, I'm much more motivated to do it. I recently bought a 36" TV for $40 from Craig's List. Way cool! It took a little patience to wait for one to show up, but it finally did and I've now got a good TV in my living room for hundreds of dollars less than I would have paid retail.

Had I not used the Dave Ramsey Envelope System, I would not have put the same value on my money and probably would have ended up with a new TV and a whole lot of financial stress. I'll take the old one and financial peace any day of the week.