When I made the emotional decision to stay home after the birth of my first son, money wasn't on my mind.
I had planned to return to work as the business editor at a Florida daily newspaper, find a nanny and adjust my hours to match my new life. Then came the day before I was to return to work. With the baby just three months old, I came home from running an errand, looked into my husband's eyes and said I couldn't do it. I couldn't leave my baby with someone else.
There was little thought about how we would pull it off financially -- even though it would mark a huge financial change for us. We had never worried about a budget because we had two incomes – my husband worked as a professor -- and few expenses. We socked away retirement with our 401(k)s, we put investments in mutual funds for a rainy day and we had a small mortgage, but other than that, we had been in good shape. There was always plenty of money to eat out and to take expensive vacations.
The baby changed that, and we just put faith in it all working out on one income.
I began budgeting, planning for our baby's future, opening a 529 college fund and creating allowances for diapers and the like. But slowly, we incurred debt on our credit cards. Then we had a second son. We never seemed to have enough. A move to Texas put us even further behind.
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Then, one day, when the kids were 4 and 6 years old, I had had enough. I felt there had to be a way to survive on a professor's salary, and I was going to prove it. That's when I devised my system.
The first step was to get a handle on the credit card debt. We each packed all but one card away and committed to one another to use our credit card only if we had the money in the bank to pay it back.
Next, I began withdrawing money from our checking account at the beginning of each month for food, doctors' visits, medicine and incidentals -- in other words, any expenses not including monthly bills. There was also money set aside for seasonal expenses, such as Christmas and our annual trip to Galveston.
I divided that money and stored it in envelopes marked according to the expense the money would cover. There was also a weekly envelope for food so that we didn't blow through our budgeted money in the initial weeks of the month. If my husband needed to run to the store, I would give him money from the appropriate envelope. When the money ran out for the week or month, that was it.
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We had to make do. This rigid system forced us to plan ahead and to think frugally. If we were low on money for food, we would dig through the freezer or have bean stew that night. If we had a scheduled doctor's visit and we were out of cash for that expense, we rescheduled for the following month.
Obviously, there were unexpected expenses: A car breaks down or a child gets sick. But if we watched our pennies, we always had money left over to put into the "just in case" envelope. And once it was all paid off, if some money remained at the end of the week, we treated ourselves with dinner at a restaurant or a movie.
We never intended to use envelopes forever -- eventually we knew we needed to grow up and manage our money like adults. And that's exactly what happened. Over time, I felt more confident about budgeting our expenses. I now have electronic "envelopes" in the way of subaccounts at my credit union and a pretty elaborate spreadsheet that allows me to adjust total expenses and income with the change of a single entry. I monitor our leftover cash and I set aside money for future braces, tuition, vacations and other expenses, all electronically.
I'm thankful for my envelopes. They allowed me to get a handle on our expenses and, of course, our credit cards. They taught me to budget with confidence, and now I don't have to hold the cash in my hand to make sure I don't overspend.
The Investing Answer: There is something comforting about using cash: You feel like you are getting back to basics and that you are being responsible. Central to success with the envelopes is minimizing the use of credit cards. If you are still leaning on your cards, that defeats the purpose of having the cash in your hands when you pay.