Cash as a commitment device
What is a Commitment Device?
Never heard of a commitment device?
A commitment device is a choice that an individual makes in the present which restricts his own set of choices in the future, often as a means of controlling future impulsive behavior and limiting choices to those that reflect long-term goals.
The most interesting example I heard was of a man who wanted to lose weight and so we took embarrassing pictures of himself and gave them to a friend who promised to publish them if he did not meet his weight loss goal. Just having a budget it a way to control the actions of your future self. It allows your logic to take control before you emotions get out control.
Cash as a Commitment Device
Cash can be a more serious method of keeping spending under control. Unlike a credit card or even a debit card, cash holds a hard line on your spending. Once the cash is gone you can’t spend any more of it.
We use an envelope system for certain parts of our budget that we don’t use automatic bill pay for.
- Groceries
- Household
- Personal Care
- Dining Out
- Kid’s Allowances
We use cash for each of these categories for some different reasons. Groceries/Household/Dining out – to help to control spending. Personal care/Allowances – Because money comes out of those at irregular intervals, but I don’t want to spend the money in other places by accident.
There are people who use cash for all of their budget, but for us that seems like a bit of overkill. We have found that for these categories it works perfectly for us
Image by 401(K) 2012
Envelope budget
Envelope budget system
My wife and I often get asked how we manage our budget on a practical level. It is all well and good to have a piece of paper somewhere telling you how much money you are supposed to spend each month, but it is much more difficult to actually manage to that budget. There are many ways this can be done. Mint.com‘s budget system will track all of your spending categories and can even alert you when you go over budget. Some people do this manually with a spreadsheet or by keeping all of their receipts. We use an envelope budget. We pull cash each paycheck and put that money into envelopes.
These envelopes correspond to various categories of our spending and when the envelope is empty we are out of money for that particular category. If there is no money in the “Eating out” envelope we eat at home. Or at least we should, we aren’t perfect. Using this method makes all the money spent more tangible, you think more about each decision to spend. It also helps us to ensure we don’t go over our budgets because in theory we shouldn’t be using our debit card, where spending is much easier to lose track of .
Advantages to the Envelope budget system
- Spending is easier to track – As I mentioned above, you know exactly how much money you have left in a particular category. You can all so put your receipts in the envelope to replace the cash to know exactly where you spent the money.
- Theoretically impossible to break – If you only spend the money that is in the envelope you will never go over your budgeted amount.
- Money easily carries over to next budget period – Money not spent during the week or month carries over ino the next time period. This allows for visual savings or if you need larger amounts like for a family hair cut.
Image by kgnixer
Drawbacks to the Envelope budget system
- You don’t always have the right envelope – We have many times decided to go out to eat after church but we didn’t bring our eating out envelope. Now we have to decide what to do? Will you deposit the money you spent from your envelope?
- You need to pull cash regularly – It is inconvenient and we often forget to pull the cash so we end up using the debit card and trying balance that by not pulling the full amount of cash.
Envelope budget apps
These are from the Google play store. Sorry I don’t use iOS but there must be some out there?
How do you manage to your budget? Are there any good apps you can recommend? Tell us in the comments below.