Back in the day, when people actually “cashed’ their paychecks, and people paid for their life insurance by giving a weekly quarter to the agent, families budgeted by using the envelope method. They would place the cash available for each spending category in separate envelopes. As our culture became more comfortable with checking accounts, this strategy was mostly used to teach young people about budgeting. I imagine parent conversations went something like this: “Put 50% of your allowance into the envelope marked ‘treats,’ 25% into the envelope marked ‘savings,’ and the last 25% into the envelope marked ‘charity’.”
Today, I use the same technique except that I ask my clients to use bank accounts instead of envelopes:
Together we determine how much they need to place in their bill paying account for their regular, ongoing expenses.
We schedule when and how much they pay for the bills that are fixed and ongoing.
They make a regular payment to a money market account, out of which they will pay their large, infrequent expenses. This account also includes savings for the unexpected but inevitable bills such as auto service and repair expenses.
Ideally their savings occurs before they even receive their paycheck, to assure that they pay themselves first.
The habit that I want to break is the unconscious habit of transferring money from savings to checking when no thought is given as to why the transfer is necessary. Since most couples have TWO individuals, each with their own set of beliefs about money, along with TWO different types of spending habits, the improved communication facilitates more amicable relationships, brighter financial futures, and produces better financial planning clients.