You’ve probably heard of the Cash Envelope System, or something like it, before. You basically pay for your expenses with cash as much as you can, storing that cash into envelopes. It’s supposed to help you spend less and it’s a great method to stay on track with your budget and avoid overspending.
But paying with cash in a digital world isn’t easy. My 20s were a constant cycle of trying to incorporate the Cash Envelope System, failing to successfully implement it, and then falling back into the cycle of overspending with credit cards. And with COVID-19, many businesses are moving to virtual payment methods only, so paying with cash has become even more of a challenge for anyone who wants to use this method.
I first heard about the Cash Envelope System from a financial planner who suggested it when I was paying off debt. It was an ideal method, as you’re basically using “piggy banks,” the same method I used as a child to save for a big splurge (hello, Scholastic book orders).
As an adult, I could allocate my latest paycheck with the goal of primarily keeping cash at hand without relying on credit. Each payday, I would pay all bills (rent, phone, internet, Netflix, gym membership, and credit card) through e-transfer from my checking account or online. Then I would allocate my savings. I saved for retirement in a long-term savings account and kept my emergency fund in a high-interest savings account. From there, I would withdraw cash needed for any remaining bills and living expenses. This cash would be divided among envelopes so I knew how much I had available for each category of my spending plan:
- Pet food and veterinary visits
- Personal Care
- Home Maintenance
- Large purchases (i.e., replacing an old computer or phone)
- Further education and professional fees
Sounds easy enough, right? This, however, did not last long. It just got way too complicated.
For example, there was a quick Uber trip in which I needed to use a credit card to pay. I wrote a note in my phone to deposit the money from the envelope to the credit card when I get home. Then the cycle continued, more expenses would require the use of a credit card and not cash. I did my best to manually track how much to add back to the card, but after a busy weekend, it was hard to keep up. It got to the point where I also created a separate envelope with money to deposit since the ATM only gave me large bills and it was a hassle to physically go to the bank to deposit the cash before the next pay cycle.
I knew there needed to be a change since this system always resulted in me turning to credit cards and overspending. The solution? Last fall, I got a pre-paid, reloadable credit card, and it was a game-changer. It allowed me to allocate discretionary spending to that card so that I can limit using credit cards as I continue to pay them off. I could mentally keep track of my allowance so I know that the money on the card is money for food, transportation, and other things not considered fixed expenses or savings. Within the prepaid card’s app, I can even create savings goals to stash away money for upcoming expenses and avoid impulse buys. I also have separate savings accounts at separate financial institutions for various savings goals (building an emergency fund, vacation, retirement, etc.) which also sort of act as envelopes.
These are the methods I followed to build my virtual envelope system:
1. Think outside of your bank.
Most people are loyal to one specific bank and will have a checking, savings, and credit card at one institution. There are many advantages to sticking with one bank, including the potential for better rates and fees and building a long-term relationship to manage your assets. However, only sticking to your bank and the products and services it offers may limit your potential to access other services, grow your money, and save on fees. I was constantly being hit with fees, for example, if I had more than ten in-store transactions on the checking account for the month, I would be charged $1 per transaction thereafter.
To get around this, I’ve been leveraging new fintech services, like that pre-paid, reloadable credit card, to take advantage of a checking account with credit card features (and no fees!). I’ve also been using robo-savings accounts to save on fees that my main bank would otherwise charge. I also have a savings account at another bank with a rate twice as high compared to what my old bank offered..
2. Leverage different accounts for a purpose.
In order to create the visual separation that the envelopes provide, I have multiple accounts for various purposes. In addition to thinking outside of my current bank, I also labeled the goals of my accounts to ensure each one had a purpose. Here is a summary of what the “envelopes” look like now:
- Checking (Main Bank): no change here, but this is where all money is deposited (i.e., paycheck)
- Savings Account (Main Bank): These savings are used for annual and large expenses, like home maintenance and professional dues. The interest rate is low, but compared to the cash sitting in an envelope, at least there’s now some growth.
- Investment Account (Robo-advisor): I invest in retirement funds automatically, based on my risk tolerance. The robots do the work and the fees are much lower than my bank.
- High-Interest Savings Account (Robo Advisor): This is for short term savings such as vacation, further education, etc. I take advantage of a higher interest rate compared to my bank and have the ability to save for multiple goals within the account.
- High-Interest Savings (Other Bank): this bank offers the highest interest rate for a savings account, so I keep an emergency fund here.
- Credit Card: I use this for all fixed expenses (bills, subscriptions, and recurring payments) and pay it off in full to take advantage of credit card points and avoid interest.
- Prepaid Credit Card: This is for all my discretionary spending with “sub-envelopes” where I save for immediate goals. For example, if I know I want to stash away money for a concert, I create a goal and contribute as I normally would using a physical envelope.
3. Set it and forget it.
To manage these seven accounts, I’veautomated everything. I deposit each paycheck into the checking account and divvy it up into the other six accounts automatically, according to my budget. Pro tip: I set the transfer date to the day after payday, in case of any issues or delays. Since the pre-paid credit card is used for my discretionary spending, I review it daily in the app to track my day-to-day expenses. I check in on all my other accounts every week or two, using an online financial tracking app for an aggregate view.
Just as a physical envelope system takes effort to set up, this method required time at the start to research the right accounts. But the payoff is worth it — this system has allowed me to achieve my goal of creating visual separation with my finances. As a result, I spend less time tracking money and physically going to the bank, I cut out bank fees completely, and I can take advantage of my money growing. Most importantly, this system has helped me stay on track with my spending plan — I hope it’ll do the same for you.
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