Way back when, before the advent of debit and credit cards as the preferred payment method (and the influx of VISA commercials making you look like an idiot if you use cash), we used to use the envelope system. We carried some cash for spending money, and used my checkbook to pay for discretionary expenses. Once the account was down to zero, we were done spending. If we wanted something, we saved for it.

But then credit cards with very low rates came along, as well as rewards programs. Why not pay for everything with credit and get $200 back at the end of the year, or $300 in a college fund for your kids, or a week's worth of lodging at a luxury Marriott while on vacation?

But now, in the face of a struggling economy and much-squeezed family budgets, the simplicity of living on cash makes the envelope system seem much more attractive once again.

What is the "envelope system"? Simply put, it means cashing your paycheck, dividing up the cash into pre-determined amounts based on a family budget, and then stashing the envelopes in your purse or car, ready to shop on a moment's notice. Once your envelope is empty, you're done buying--or you transfer money between envelopes. It would be impossible to spend more than you earn, so the theory goes.

If you're looking for a thorough guide on how to use the envelope system, pick up one of money guru Dave Ramsey's books. He's a crusader against credit, and even though I'm not a plastic hater, I have to admit the guy's got credibility. He's been bankrupt and back. He's debt free and he's helped thousands of others get that way.

However, I can't help but put a modern spin on the old envelopes-with-rubber-bands way of stashing funds. For one thing, walking around as a robber magnet with oodles of cash doesn't make me warm and fuzzy. For another, who says you can't earn those rewards and still pay with cash?

So I'd like to offer an update to the system, new and improved for 2008.

Start by revising your family budget. Make sure you account for fun stuff (like vacations and holidays), and make sure all bi-monthly, quarterly, semi-annual and annual expenses are included. Include unexpected expenses, like home and vehicle repairs. Take what you spent last year and break it down into pay period amounts. Set aside those amounts in a savings account to be used for unexpected expenses this year. Double-check your savings and investments, too. Are you saving enough? If not, boost your retirement account contributions. don't do this after you account for discretionary spending. Do it beforehand. Is retirement really optional for you? I didn't think so. Once your fixed expenses are calculated, figure out a per-paycheck amount for each category. Add up all those per-paycheck amounts, and now you have a grand total of fixed payments that must come out of every paycheck you receive.

What's left over is your discretionary spending. Period. That's all you get.

Take that discretionary spending and break it down into categories. Food, gas, clothing, cleaning, co-pays, fees, hobbies, recreation, eating out, movies, etc. If you find these categories exceed your discretionary budget, you need to start cutting. Find painless cuts first. Keep going until you're breaking even; then try to cut another 10%. Now you can save that 10% in a rainy day fund, or contribute more to your retirement account!

Once you've balanced your budget, set up two different checking accounts. One is for fixed expenses, another for discretionary. Utilize electronic direct deposit to deposit your total fixed expense allotment into the fixed account, and the remainder of your paycheck into the discretionary account. Schedule those transfers to a rainy day savings account out of the fixed checking account, so you don't have to "remember" to do it.

Now use a debit card (with adequate fraud protection) to access the funds in your discretionary checking account. Use a regular checkbook register to subtract each debit card purchase you make, just as if you wrote a check (because the money is taken out of your account almost immediately). Decide on a "fun money" cash budget and withdraw that amount from the ATM on payday. No other trips to the ATM are allowed.

If you have money left over in your discretionary account when the next payday arrives, transfer it to your rainy day fund!

It really is time to end our love affair with credit. Let's face it, credit hasn't been a very good partner to most of us. Try using the "updated" envelope system and see whether it doesn't help you end the relationship--for good.