A Green Tale
“The Envelope Please”
I am a sucker for the Academy Awards show. When I hear those magic words “The Envelope Please” and the winner is? I get a thrill as my favorite is surely to be announced. In this tale if you follow what I prescribe the winner will be you. This is a help get out of debt tale or a how to save tale and it works. I learned the concept as a young boy and though my advice will probably fall on deaf ears it’s worth telling because it can change your life. This tale is for people that want financial transformation and are willing to try what may seem offbeat in this day and age of plastic. The reason why it works is because when we use plastic or a credit card to make purchases we tend to overspend. I am no different. We buy things that we wouldn’t otherwise if we used cash.
One of my friends, Dave, someone I’d known since I was a child had been married for a few years and he and his wife Cindy were renting a place not far from where we grew up. It was 1992 when I ran into him one day and we exchanged pleasantries and caught up on our lives. He knew I was in the financial business as he put it and asked if I could work with him and Cindy. I said sure and a few days later I was seated at their kitchen table going over things. As I may have said before, I have always taken the time to meet my clients at their home early in our relationship because I get messages, signals, insights from how they live that help me with advising them. See A Large Tale for an example of why it’s important though not necessary that you meet with people at their home.
What happened at their house? I did my customary discovery and found out that despite a joint income of almost $160,000 per year they had no money saved, no investments, no house since they rented, their two cars were leased and they had amassed almost $30,000 in credit card debt. I wanted to take Dave and kick his you know what for his financial irresponsibility. Here was a man and woman that loved each other and wanted to start a family but were overspending to such a degree that they would invariably grow to resent each other if they couldn’t get on the right track.
How did we make their lives better? I say we because Dave knew they had a problem or else he would have never asked for my advice. Cindy knew it as well. I had what by 1992 was considered a novel solution because it was long forgotten. It’s simple and it works. I call it the money envelope system and I originally learned it from my mother but when I saw other people using money envelopes I would ask them about their system when I was a child and was able to recommend a system for Dave and Cindy that transformed their lives. I give them a lot of credit. There is a saying that is remarkably accurate which is “When the student is ready the teacher appears.” I also have a person philosophy that says “You get exactly what you want out of life” that I also have observed to be true. In their case they were ready and wanted more from their lives and I was fortunate to help them.
What did I do? I asked them to get me all their credit cards and after they agreed that they would stop using them we destroyed them. We took a scissor and cut them up on the kitchen table. The physical act of removing yourself from the ease of plastic goes a long way towards successful saving and in their case debt elimination. We then took out a box of envelopes. We marked 2 money envelopes with the word’s Dave’s gas money and Cindy’s gas money. These were to go in the glove compartment of their respective cars and they were to pay cash for their gas from now on. We marked 3 more money envelopes with Dave’s walking around money, Cindy’s walking around money and Dave and Cindy’s fun money. We then marked an envelope with the words groceries and another with the word gifts and holiday shopping. We then had two more for each of their clothing expenses. We had two more for what we called beauty. Lastly we had two more envelopes. The first was auto repair and insurance and the second was vacation.
I’m sure by now you can guess the reason for all these envelopes. We were creating a financial budgeting system for Dave and Cindy. The idea was to categorize each of your monthly expenses and wherever possible pay in cash. Every behavioral study shows that paying in cash hurts more than with plastic and they were willing to suffer the pain of saving for their future. Not every expense such as rent or mortgage, car payments, utilities and a few others can become envelope eligible but where most people get into overspending is on envelope eligible items. This system works. It’s been around forever and until we have an evolutionary change that lets us treat plastic like cash will be effective in your life.
There is one final twist. Dave and Cindy wanted to buy a house but had no down payment. They needed to get out of debt and they agreed to pay $2000 per month towards their credit card debt. In addition, they agreed to fore-go vacations until they were debtfree. Two years later they were debt free and in 1994 they purchased a home for about $200,000 that is today, 2008, worth almost $750,000 and they have two healthy young boys to dote over. They now live debt free, own their cars, have investment accounts, they contribute to their company retirement accounts to the maximum allowable limit and life couldn’t be better. Have they hit the jackpot or tripled their earnings or some other miracle? The answer is no. They simply learned how to save and avoid plastic. The proof is when I recently went out to lunch with Dave and he offered to pay. I didn’t think much about the money envelope system thinking they had discarded it long ago and out comes the money envelope to pay for lunch. It said on the outside “Dave’s walking around money.”
Financial Tales has been promoting Financial Literacy since September 29, 2008.
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