As I've been talking to people about our cash budget I've heard some of the same questions. A lot of people have tried the cash budget system before (we did too) and have had problems. Our first attempt failed miserably as well, so we've learned a few new things this time that have helped with some of the "quirks". I figured I'd do some FAQ to get some of the answers out to people that are looking to give it a second try!
What are your budget categories and how to you do know what to put under each category?
Our categories are Groceries, Entertainment, Gas/Car, Clothes, Personal and Individual "fun" money.
Groceries only includes food for us. You can do it however works for you, but we decided to take toiletries, cleaners, diapers, etc out of that category. Entertainment includes any outings or hanging out that the family goes on, eating out also goes under this category. Gas/Car includes oil changes and money for registration each year. Clothes is one category for the whole family. Personal includes all the household items that don't go under groceries. It also includes things like haircuts, one time expenses that don't go under other categories like carpet shampooing. This also includes pet expenses if you have them. In our relationship it works well for each of us to have some money that is ours to spend any way we want. It's basically a little bit of "freedom" money for each of us and it protects against our family entertainment budget being used by one individual's hobby/hang out times. So we each (the adults) have a monthly spending allowance too. Gifts is not taken out monthly, but we set money aside for those special occasions each month.
Keep in mind that if you are working on getting out of debt, you need to be willing to make sacrifices in EVERY category of spending. There is no category that can be "off limits" to have some cuts for a month or two. If it's gas money, then maybe you'll have to stay home a few nights a week or find things to do that are closer to home. Same goes for every category, sacrifices will be required of you in all areas in order to get out of debt.
What do you do if your income isn't consistent each month?
This was one of the ways we messed up the first time. We tried to figure out how much we needed for each category every month without figuring out that each month might need to look a little different and that our income might not always be exactly the same amount either. This time around, we made some changes. First of all we evaluate our cash budget every two weeks, based on my husband's paycheck. Second of all, we have learned that some areas are going to have to be "flexible" amounts and some weeks we'll have to make do with less in some categories.
How do you know how much to take out for your budget?
We estimated a reasonable amount for each category. We used Dave Ramsey's percentage chart to help guide our amounts too. During months that we have the full amount to spend, we'll take it all out and categorize it, otherwise we have to cut in the areas that we are able to for that month. For us it didn't work to do all the cash budget for the whole month at one time. We ended up taking out too much of one paycheck and didn't leave us enough to cover all of our bills.
What do you do with large budgets that are spent at a certain time of year (ie. Christmas, car registration)?
You can do this a few ways. You can have it as a category in your cash budget and set it aside all year in an envelope designated for that expense or you can have a savings account that you transfer money into each month to keep that money available. If it's something like Christmas, you can shop throughout the year and have an amount you can spend each month and just keep the presents hidden away until December. It still needs to be part of what you are "spending" each month, so that it doesn't land all in one month.
How do you handle automatic payments? Online Payments?
Any automatic payments that we had scheduled on credit cards were cancelled. Now we either do it on our debit card or through bill pay. We don't use our credit card for anything any more. If you are used to paying your bill online for each individual company, then you would start using a debit card for those payments. Remember to account for these purchases when figuring out your total outgoing for the month to make sure you don't over spend.
What do you use for online purchases?
Again, credit cards are banned! If you need to make a purchase online (which we have continued to do regularly) you need to use your debit card. If it is bought after you've figured out your cash amounts, then you'll need to take the cash out of the envelope for the category it falls under and re-deposit it into your account. This may require you putting off buying it until you get to the bank.
How do you use Bill Pay with the cash system?
I still pay all our bills online through our bank. Every two weeks when we get a paycheck I'll first pay every bill that is due before the next paycheck and subtract that from our income. If there are bills due after the next pay check, but I'm not sure we'll have enough to cover them from one check, then I'll pay additional bills with the first check. Once the bills are all paid, then I will figure out our cash amounts. Keep in mind that since I'm doing it every two weeks, the cash budget totals are in half, so that it gets us through the whole month.
**Side Note: Tithing/Charitable Giving
This is part of our personal conviction and family values, but it is also addressed through the Dave Ramsey program, so I'm addressing it in case this is a question others are wondering about. Our family believes that we should give 10% of our monthly income to our local church and when we have it to give we give above that amount to other charities, missions' organizations or ministries we feel the urge to support. This is an area where Dave Ramsey agrees with us, even during the debt diet, giving to God is never eliminated from your budget. In our house it is the only "budget" that is non-negotiable. We have always believed that no matter what our financial situation, living in obedience to God's instruction about giving has been our priority. It is also what has carried us through really difficult situations. When you live by faith, God provides for you. Now who doesn't want God to be your financial advisor and institution?
I hope this helps with some of the quirks of a cash budget. If you have other questions, leave a comment and hopefully we'll be able to come up with an answer, if not me, maybe another reader!