1. Pull out the total of your weekly (biweekly, monthly) budget in cash.
2. Separate the cash into envelopes by category according to how you’re budgeting that money.
3. Spend down the envelopes as you buy things.
4. Re-budget by transferring money from one envelope to another (no free lunches!)
5. Re-fund the envelopes at the beginning of the next budget period, re-evaluating as necessary.

This cash-only system is straightforward.  It doesn’t use credit cards, and therefore greatly reduces the temptation to overspend.  It doesn’t even use debit cards, which can trigger a lot of fees if you get too close to the bone and start incurring overdraft or non-sufficient funds fees.  Of course, you can always go to the ATM to get more cash, but that takes effort — possibly enough effort to get you to think twice about doing it.  That’s the main advantage of the cash-only system: it restrains you.

The main disadvantage, of course, is that you don’t have the convenience of electronic payments in a pure cash system.  Buying online is a transaction that can’t be fulfilled directly from an cash envelope system.  It’s hard to stuff a $20 bill into your modem and send it to Amazon.

This question over at the Personal Finance and Money Stack Exchange site was asked by Alex B:

Using a cash budget, say we save $100 for household items.

Typically, we would withdraw $100 from the ATM, put it in an envelope, and then later, go to home depot or walmart or wherever and buy an item for $20.

Now I want to buy one item from Amazon.com (or anywhere online).

What is the best way to handle this? Do I go re-deposit the cash? Do I leave money in my bank account in case I need to buy something online?

I’m looking for strategies to track that $100 and be able to buy items online.

It’s a good question.  Shopping online often gives much better deals than going to a brick-and-mortar.  Specifically, though, a cash-only system makes these kinds of purchases a pain, almost by design.

My suggestion around this is to create another envelope called “Online” and pay that envelope from the other envelopes as online purchases are made. It works like this.  All envelopes except the Online envelope are funded normally.  The Online envelope starts the budget period with nothing:

As online purchases are made, the money for the purchase is taken from the appropriate budget envelope and put into the Online envelope.  As an example, let’s say that we went to eBay and bought a 4-CD set for $12.  We buy the CDs with the checking account that is used to fund the envelopes.  This is classified as “Fun Stuff” so we’d take $12 out of the Fun Stuff envelope and put it into the Online envelope:

We have tracking!  The proper envelope was “debited” and we know by how much.  The way to balance things out in this example is either (a) withdraw $12 less from the bank account the next time around and use that withdrawal plus the money in the Online envelope to fund the other envelopes normally, or (b) take the money in the Online envelope back to the bank, and re-deposit it.

One thing you may have noticed already is that there’s a danger in overspending the checking account.  That’s the price that’s paid for allowing online transactions into what should be a cash-only system.  The $12 transaction is on its way out of the linked checking account, immediately.  It won’t wait for the next time the envelopes are funded.

So, do you wait until the next funding cycle, or re-deposit the money?  That depends on how much cushion is in the checking account.  If there isn’t much cushion, you should take the cash back to the bank so that you don’t overdraw the account.  (If there’s no cushion, you probably shouldn’t be doing online purchases at all with this system.)  If you have plenty of cushion, you can wait until the next funding cycle to zero out the Online envelope.

So there you have it: a how-to on hacking a cash-only system to include the field of deals that is the Internet.

(Thanks to Budgeting in the Fun Stuff for including this post in the Totally Money Blog Carnival.)

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There’s a fair bit of activity on eBay buying and selling 95% copper cents, and the coin sorters to distinguish them from the newer zinc variety.  Why the interest, you might ask?  It’s the copper content of the cents that’s interesting.  These high-copper cents, minted for part of 1982 and most of the years before, are now worth more than twice their face value based solely on the copper content.

Basically, each one of these cents has more than two cents’ worth of copper in them.

This mismatch has come about from a decades-long, systematic increase in the money supply.  A dollar today only buys 8% of what it bought eighty years ago.  Since just the turn of this century, it already buys 22% less.  Since there are more dollars chasing the same (or nearly the same) amount of goods, prices rise on average to meet the increased money supply.  The prices of everything are affected, including copper.

The composition of the cent changed in 1982 from 95% copper to 5% tin/zinc, to 97.5% zinc, 2.5% copper.  Zinc is a cheaper metal, but a cent is a cent as far as the cashier is concerned — and as far as the Mint is concerned.  Over time, it makes less and less sense to spend the high-copper-content ones.  They’re kept instead, since at some point it makes more sense to keep them for their copper.

For the time being, though, would-be smelters would break the law if they extracted the copper from cents.  They are also forbidden from exporting anything but trivial quantities to countries where it wouldn’t be illegal.  (A similar ban was enacted after silver was removed from dimes, quarters, and half dollars.  The ban has since been lifted.)  What is still legal is shipping them within the country and storing them as just a large pile of cash.

Enter eBay and others.  You can buy pre-sorted cents, by the pound, in quantity.  Not just the older wheat cents (pre-1959) but the more modern Lincoln Memorial cents (1959-1982).  Circulated wheat cents are more sought-after by coin collectors, so they go for a premium anyway.  The newer ones, though, are still widely circulated, but they’re getting less so.

I just saw an auction for 500 pounds of 1959-1982 cents go for $1,200, with free shipping.  This price is between the face value of the money and the market price of the copper in the cents.  The face value of the lot is

500 pounds * 454 grams per pound * $0.01 per 3.11 grams = $729.90

The value of the copper in these cents is

500 pounds * $3.91 per pound of copper * 95% copper content of cents = $1,857.25

The reason for buying is appreciation of the underlying commodity in dollars. (I suppose, also, that the coins themselves become more collectible as time goes on as well.)  At some point in the future it will pay to sell these.  It may even pay to melt them (assuming the ban is lifted after the “easy money” is no longer so easy).  More to the point, though, it’s trading something that holds value with something that is clearly losing value.

Storing these old things is a cost that some people obviously are willing to bear.  People who pulled out their silver dimes are pretty happy now, I’d think; the reasoning for pulling out the copper cents is the same.  Cents are bulkier relative to their value than silver dimes, and far bulkier than gold coins, but the cents are what people can get their hands on at a discount to their true value, now.

I was born too late to see the silver money go out of circulation, but we all have front-row seats to watch the copper cent go away.  And we can watch it on eBay!

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“Wasn’t a provision of the financial reform bill that passed this July that store owners are now legally allowed to not accept a credit card charge for less than $10? I’m almost sure it was.”

I hadn’t gotten wind of this at all, but I dug around to try to verify Paul’s claim.

Sure enough, Paul got it.  Payment card networks are no longer allowed to demand that merchants accept all payments, regardless of total amount.  They can only demand that merchants accept all payments not less than $10.

The bill Paul was referring to is  HR 4173:  Dodd-Frank Wall Street Reform and Consumer Protection Act, and was put into law on July 21st, 2010.  Section 1075 of this law (beginning on page 693 of this printing of the new law) amends the Electronic Fund Transfer Act of 1978.  The part that restricts payment networks as to the minimum charge they can force merchants to accept (which, up until about a month ago, was $0.01) is detailed in Section 920(b)(3)(A)(i)(II) of the amended EFT Act.  Beginning with the amended section 920(b)(3) (page 698 of the new law, for those of you who are following along):

(3) LIMITATION ON RESTRICTIONS ON SETTING TRANSACTION MINIMUMS OR MAXIMUMS.  (A) IN GENERAL.—A payment card network shall not,
directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability (i) of any person to set a minimum dollar value for the acceptance by that person of credit cards, to the extent that (I) such minimum dollar value does not differentiate between issuers or between payment card networks; and (II) such minimum dollar value does not exceed $10.00 …

That is how the law is now.  In the amended section 920(b)(3)(B), it further goes on to say that this amount may be increased under certain process.  Meaning: There are avenues for making the allowed minimum greater, so down the road merchants could require $20, $30, or more before I can pull out my credit card.

If that was a bit hard to follow, I don’t blame you.  Here’s a simpler way of expressing the impact of this.

Let’s say a merchant has a sign next to the cash register that says “Minimum Credit Card Charge $10.”  Prior to July 21st, 2010, he would be violating both Visa’s and MasterCard’s merchant agreement, and could face heavy fines from the issuers if he refused to accept a smaller payment, and the customer reported it.  After July 21st, 2010, the merchant doesn’t have to worry about a customer ratting them out, because the issuers can’t demand it.

This is a game-changer, and not a good one, I’m afraid:

• It’s not at all a win for consumers, even though the law is advertised in part as “consumer protection.”  Ten dollars is not a particularly small amount.  I can easily get lunch out for less than $10.  It ultimately places restrictions on credit card use.  It forces consumers to carry debit cards, or cash, for some small purchases.  Payments may become more inconvenient.  Do you pay $10 at the pump for the $8 worth of gas you use to fill your motorcycle, simply because the merchant isn’t obligated to accept your $8 credit charge?  Or do you have to walk in to pay cash?  It’s more costly, less convenient, or both.
• It might be a small win for businesses that are not payment networks, as they have protection against merchant account agreements that demand that the merchant accept payments so small that they are a net loss for the business.  But if the merchant opts to avoid these kinds of transactions to the full extent of the law, then they could be turning away more profits than what they’re saving in losses by avoiding the small credit transactions.
• It’s a clear loss for payment processors. Their total transaction volume will go down, and along with it their fees.

This regulation hasn’t hit the stores a whole lot yet, but it will.  The law is barely a month old.  As a former eBay seller, I know how much these fees can run, and it’s likely not much different for brick-and-mortar stores.  I’m sure store owners will take secret pleasure (and relief) in being able to turn away customers that have been abusive with small credit card transactions.

The only advice I can give is to carry around more cash for the little things so you’re not caught by a nasty surprise when a store won’t accept your credit card.  Sorry!

(Thanks to Budgeting In The Fun Stuff for including this post in the Carnival of Personal Finance!)

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• Social Security checks don’t go up.
• Marginal tax bracket cutoffs don’t go up.
• The standard federal income tax deduction doesn’t go up.
• Interest rates on savings accounts are in the basement.
• Etc., etc., etc.

These bad things are all distractions from what’s really happening. Let’s compare a couple of examples.  (Before getting in too deep here, inflation is not the same thing as rising prices. Inflation is an increase in the money supply, after which rising prices follow.  But will just treat them as kind of the same thing in this post to keep things simple.)

First, an inflation example.  Say I could buy everything I needed last year for $20,000.  This year, the exact same stuff costs me $21,000 because there was 5% inflation last year.  A social security check that was $1,000 last year is $1,050 this year, but so what?  It buys the same stuff.  My savings account was earning 6%, but that’s only 1% return after inflation.

Next, a no-inflation example.  Say, this year, I can still buy everything I need for $20,000.  A social security check is still $1,000, but that’s all right, because it still buys the same stuff.  My savings account earns 1% (“in the basement”) but at least it’s a real rate of return.

Inflation – an increase in the supply of money – has been going on for decades.  It’s so entrenched in our economy that it’s commonplace.  Prices go up, sure, but wages go up thanks to inflation-based cost-of-living adjustments (COLAs).  We see larger numbers in our paychecks, and we feel richer.

But why is that we feel poorer when the money supply is stable, there’s no inflation, and therefore no COLA?  It shouldn’t, but it does.  Having no COLA next year should be a good thing, yet we feel instead like we’re falling behind.  What’s more, if we never had the need for a COLA, we wouldn’t be having this discussion! The reason “no inflation is ‘bad’ for us” now is because so many things in our financial lives are tied to inflation.

If there were no inflation (well, none beyond what was necessary to support a growing economy) then there wouldn’t be the need to tie anything to inflation, would there?  It’s putting the cart before the horse.  The COLA is around because inflation is around.  Zero inflation doesn’t take your COLA away — the COLA goes away because of zero inflation.  In the end, anyway, a true COLA wouldn’t matter at all, since it would just rise (and perhaps fall) with the money supply.

What’s the bottom line? Zero inflation by itself is not a bad thing at all.  It’s actually a Very Good Thing that we’re unlikely to see in our lifetimes.  It would mean that the money supply is stable and not being diluted.  Zero inflation only appears bad because so many credits, checks, and other goodies are tied to inflation.

It’s important to have the cart behind the horse.

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After reading her list of reasons not to get gift cards, I’m becoming less of a fan of them myself (unless I can get them for free, of course).  I didn’t know, for example, that some retailers won’t let you split purchases with gift cards.  This means that if you have $3 left on your card, and the cheapest item in the store is $4, you’re out of luck.  That would tick me off royally.  I don’t think I’d shop there again if they pulled that.

Cash doesn’t suffer from this problem. I mean, well, it does lose a little bit of value every day from inflation, but it doesn’t expire, there aren’t any fees associated with holding it, it’s accepted pretty much everywhere, and can be spent (or not spent) for pretty much any reason.

Even if the gift of cash is used the typical way — for buying something the recipient wants — it encourages wise spending.  It encourages post-holiday bargain hunting, shopping online, shopping eBay, shopping thrift stores, bidding at auctions, looking for deals on Craigslist.  It puts a lot more power in the hands of the recipient than a gift card would.

Shopping for deals isn’t the only way it can be used.  It can buy necessities.  It can be saved, or used to pay down debt.  It can even be given away — regifted! — to someone less fortunate.

What’s more, with only a small amount of effort, one can give a gift of cash that’s fun.  Dollar coins are fun to spend (at least I think they are).  Two-dollar bills are great, especially if the recipient tries to spend them in Best Buy.  Or put in just a little more effort and do some money origami.

Cash.  It can be a tender gift, and it really fits the bill this holiday season.

Thanks to Well Heeled Blog for including this post in the Carnival of Personal Finance.

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