Debit cards have been sold as a safer alternative to credit cards, but when it comes to budgeting they can be just as dangerous. That’s because debit cards offer the same convenience as credit cards and people don’t feel the emotional twinge of money actually leaving their wallets. For this reason, my family recently went to a cash-only envelope budgeting system.

Listed below are the steps we took to implement our envelope budgeting system:

Step 1: Determine which categories to include in your budget. Not everything in your household budget can fit into an envelope, literally. Things like utilities, subscriptions, and other recurring monthly bills are typically paid online or via bank draft. The real spending categories we are interested in are discretionary spending categories.

For our family these are food, household products, gifts, entertainment, and clothing. In the beginning we also included gasoline, but the pay-at-the-pump feature is just too convenient to pass up on a cold, rainy day, so we still use our debit card at the pump. Who wants to carry kids into a convenience store to pay for $30 worth of gas in cash?

Step 2: Use past spending to establish initial budget amount. Using Mvelopes and my online banking system’s export feature, I downloaded our last 90 days of transaction history. I identified which transactions fit into each of the five categories listed above. This is not an exact science as $45.90 spent at Walmart won’t help you remember the itemized list of transactions, and to which category they belong. If you still have some receipts, great. If not, just estimate your typical breakdown on a trip to Walmart.

For us a $45 transaction at Walmart might look like: $20 on groceries, $10 on clothing, $15 on household products. Using your best estimate come up with an average monthly expenditure for each category.

Step 3: Create a budget envelope for each spending category. Write the name of the category and the monthly amount budgeted on the outside of the envelope. You may not have enough float in your checking account to withdraw all the cash to fill all the envelopes with your first paycheck each month. That’s fine, just break down the monthly budget amount by the number of times you are paid in a month. In our family the “Food” envelope gets $200 every two weeks (I am paid biweekly), for a $400 monthly grocery budget.

Step 4: When the budgeting envelope is empty, stop spending. The only way this budgeting system will work is if you make a pact up front not to move money between envelopes, and to not spend additional money in a category when the envelope runs dry. If the “Food” envelope is empty three days before payday then you better start searching the freezer for those two-year old corn dogs. If your “Clothing” envelope only has two dollars in it you have to pass up those “fabulous shoes” on sale at the mall.

Step 5: Revise and repeat. No budget is going to be perfect from month-to-month, and envelope budgeting systems are certainly no exception. At the end of the month look back at your spending and determine where you could have allocated a little more, and where you assigned too much of your paycheck.

We routinely have more in our clothing envelope than planned, but we simply leave the money in there because clothing purchases tend to come in waves when the weather changes, or as the kids outgrow their current wardrobe. We empty the other envelopes at the end of the month to make an extra contribution to our debt snowball. This gives us a little extra incentive to try to stay under budget in each category.

Valentine’s Day is right around the corner. Do you have your frugal gift giving list in order? Saint Valentine sure had it in for us guys when he decided Valentine’s Day would fall on February 14, less than two months after Christmas. It is a rare occasion when frugality and romance mix, but why not make this Valentine’s Day the year to celebrate frugally with some low-cost, romantic gift ideas. Warning, this is an area where frugality could be harmful to your health, so be sure you are giving these gifts from the heart, not just to save a buck.

Homemade coupon books are an inexpensive way to show your appreciation for loved ones. The design is not as the important as the content here, so don’t fret too much over the type of paper to use, the cover design, etc. Spend your time and energy brainstorming ideas and activities that really make your loved one happy. In a small booklet format, start listing those ideas, one per page. On Valentine’s Day present the homemade coupon book along with the promise to fulfill the coupon when presented. Here are a few ideas that may provide some inspiration:

• Good for One Free Car Wash
• Dad Takes the Kids For One Day
• A One-Hour Massage
• Dad Does the Cooking for One Week
• One “Chick-Flick” Date Night
• Get Out of Doing Dishes for One Week
• Spend One Week With No Television (not eligible for redemption during football season)

Browse Amazon.com for frugal gifts.  Amazon.com has dedicated an entire page to Valentine’s Day gifts, and the best part is you can quickly search for Her/Him by price, meaning you can quickly filter out those non-frugal items.  Then again guys, just this once, you may want to splurge a little.  I do about 90% of my holiday shopping there, including Valentine’s Day.

Plan a picnic. In some parts of the country the weather is nice enough to plan a picnic by February 14. If not, bring a coat and go anyway. Besides, cold weather usually resorts to snuggling, and that’s a good thing on Valentine’s Day. Pick up an inexpensive basket at a flea market or craft store, and prepare an assortment of your loved one’s favorite snacks at home. The menu could be as simple as some fine cheese with crackers, or homemade mini-sandwiches and a small dessert. A quick search for picnic menu ideas yields some great results. Top it off with an inexpensive bottle of wine, or your beverage of choice. Don’t forget at least two blankets (one for the ground, and one for her). Make this a surprise and add to the suspense. Load up the picnic basket ahead of time and then tell your Valentine to dress warm for a surprise date.

Take a day trip. Schedule a vacation day from the office and surprise her with a short day trip to a regional attraction. Make it a fun date – maybe a visit to an aquarium, museum, or even the zoo. Plan ahead by ordering tickets in advance, and be on the lookout for any merchants that offer deals if you buy from them (your Valentine doesn’t have to know). Plan to eat lunch and/or dinner before visiting the attraction because food at entertainment venues is nearly as expensive as movie theater candy.

Bottom line, it is true what they say – it is the thought that counts. You don’t have to go broke showering your Valentine with overly expensive gifts to show your love for them. In fact, gifts from the heart usually mean more to the recipient than something bought at a store, at least they do to us frugal dads.

The following is a wrap up of Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny:

• Day 1 – Take an Inventory of Your Finances. This step involves taking an inventory of all of your assets and liabilities to create you own personal balance sheet.
• Day 2 – Build an Emergency Fund, Quickly. The cornerstone of any solid financial plan is to have a decent emergency fund in place. Start with getting three months of expenses in a high-yield savings account.
• Day 3 – Cut Up Those Credit Cards. The easiest of all the steps, mechanically, but one of the hardest to actually do. Forget loyalties, sentiments, just cut. Save one for emergencies until a healthy emergency fund is in place.
• Day 4 – Slash Your Expenses. Now that you have slashed credit cards, it’s time to slash your monthly expenses. Cancel subscriptions, cancel the cable, stop eating out, and basically live ultra-frugal lifestyles until you are debt free.
• Day 5 – Start Saving for Retirement. Determine how much you will need in retirement and use that as a minimum target goal. Start investing in your 401k at your employer, up to any matching funds, and then fund the rest in Roth IRAs,
• Day 6 – Give the Gift of Education. Start investing in ESAs or 529 plans for your kids. Avoid “managed allocation” options and direct the fund selections yourself.
• Day 7 – Invest for an Early “Retirement.” After you are maximizing savings in tax-free or tax-deferred retirement plans begin to save outside of retirement accounts in solid, low-turnover growth mutual funds. These funds can be tapped before the traditional retirement age, allowing you to step away from your “day job” and start doing some work you love.

I received a disappointing email tonight from HSBC Direct, where I still maintain a small Christmas Club account, that advised my interest rate on savings was being lowered in response to the recent federal reserve interest rate cut.

The new HSBC online savings account rate, 3.80%, is only slightly better than the ING Orange savings account (3.65%). The banks tend to leapfrog each other so I anticipate if the fed lowers rates again ING may keep their savings rate slightly higher than HSBC’s. Either way, the rates are certainly not going to help me reach my early retirement goals!

We are writing to inform you that based on the recent drop by the Federal Reserve, HSBC Direct has adjusted your Online Savings Account rate to 3.80% APY*. At 8x the national savings average**, you are still earning one of America’s highest savings rates.

HSBC Direct will continue to evaluate and respond to market changes so we can provide you with competitive rates. And if your rate changes, whether up or down, we are committed to always letting you know.

You can feel confident knowing your savings are with HSBC Direct. We’re part of HSBC Group, one of the largest financial institutions in the world, and have over 140 years of experience helping customers manage their savings.

We sincerely appreciate you saving with HSBC Direct.

Fortunately, I only keep a small Christmas Club account at HSBC, so the lower interest rate will have little effect on my monthly investment income. I keep my emergency fund at a local bank savings account because at this point I prefer convenience over interest rates. When rates go back up, and they probably will in the next couple years, I’ll move some of my emergency fund savings back an online savings account.

Presidents are known for their letter-writing prowess, and many such letters offer great insight into tackling today’s problems. One of the great examples is Abraham Lincoln’s letter to his stepbrother in response to his stepbrother’s request for an $80 loan. I’ve presented the text of his letter below, along with a few of my comments.

Your request for eighty dollars, I do not think it best to comply with now. At the various times when I have helped you a little, you have said to me, “We can get along very well now,” but in a very short time I find you in the same difficulty again.

Do not continue to help those that refuse to help themselves. Over the years I have had occasions to help family and friends in a financial crisis. It could be said that some of my own struggles were created by my willingness to help. Through these offerings I have developed a knack for discerning which of those will take the help as a blessing and work to improve their situation, and those who will come to expect such help and do nothing to prevent their “crisis” from reoccurring.

Now this can only happen by some defect in your conduct. What that defect is, I think I know. You are not lazy, and still you are an idler. I doubt whether since I saw you, you have done a good whole day’s work, in any one day. You do not very much dislike to work, and still you do not work much, merely because it does not seem to you that you could get much for it. This habit of uselessly wasting time, is the whole difficulty; and it is vastly important to you, and still more so to your children, that you should break this habit. It is more important to them, because they have longer to live, and can keep out of an idle habit before they are in it easier than they can get out after they are in.

Work is a sure-fire money-making scheme. If you find yourself in a financial hole, first stop digging. Then, get after finding additional work, whether it be a better full time job, an additional part time side hustle, or something you can start on your own as an entrepreneurial endeavor. Do not be afraid to take on additional work, temporarily, to improve your situation.

You are now in need of some ready money; and what I propose is, that you shall go to work, “tooth and nail,” for somebody who will give you money for it. Let father and your boys take charge of things at home-prepare for a crop, and make the crop; and you go to work for the best money wages, or in discharge of any debt you owe, that you can get. And to secure you a fair reward for your labor, I now promise you that for every dollar you will, between this and the first of next May, get for your own labor either in money or in your own indebtedness, I will then give you one other dollar. By this, if you hire yourself at ten dollars a month, from me you will get ten more, making twenty dollars a month for your work.

Give those you help an incentive to help themselves, not a reason to slouch further. Lincoln’s dollar-matching idea was a great one, but there are other ways to create similar incentives to help those who need a little push. For instance, I read a story about a woman who was afraid to make the leap into a professional job because she didn’t have money for the appropriate wardrobe (even though the job offered considerably more money). Her father agreed to help her with her wardrobe for an interview and the first couple weeks on the job if she agreed to use her first paycheck to purchase additional work clothes.

In this, I do not mean you shall go off to St. Louis, or the lead mines, or the gold mines, in California, but I mean for you to go at it for the best wages you can get close to home, in Coles County. Now if you will do this, you will soon be out of debt, and what is better, you will have a habit that will keep you from getting in debt again.

Look for money-making opportunities closest to home. It’s true that sometimes the best opportunities are right under our nose. Consider your current talents and interests and brainstorm ways to turn that idea into a paying part time gig. If you enjoy landscaping your yard, offer your services in your own neighborhood. If you love dogs, create a dog-walking service in your town (a double benefit – get paid to exercise).

But if I should now clear you out, next year you will be just as deep in as ever. You say you would almost give your place in Heaven for $70 or $80. Then you value your place in Heaven very cheaply, for I am sure you can with the offer I make you get the seventy or eighty dollars for four or five months’ work. You say if I furnish you the money you will deed me the land, and if you don’t pay the money back, you will deliver possession-Nonsense! If you can’t now live with the land, how will you then live without it? You have always been kind to me, and I do not now mean to be unkind to you. On the contrary, if you will but follow my advice, you will find it worth more than eight times eighty dollars to you.

Affectionately your brother.

Bottom line, to change habits you have to experience a little bit of pain. Without making the necessary sacrifice you will eventually revert back to old ways, just as Lincoln’s step-brother would have surely done. This is probably why lottery winners go broke. They instantly receive a solution to all their financial problems without first changing the habits that created those problems. Pain and sacrfice are great reminders. Every time you feel the urge to run up credit card debt, remember the pain and sacrifice experienced trying to get out from under them.

Source: http://www.quotablelincoln.com/LincolnLetters.html