This is a guest post from Dan at The Daily Prep, where you can find tips and resources for learning to be self-sufficient.
One of Dave Ramsey’s biggest contributions to the financial world has been the introduction of his “envelope budget.”
The concept is simple. Buy a box of envelopes and label one envelope to match every category in your budget: rent, utilities, eating out, etc. Then withdraw your budgeted amount for each category in cash, and put that amount in the envelopes. When the cash is gone, it’s gone.
While the logic is sound, the day-to-day realities of the envelope budget can be frustrating. It involves lugging around multiple envelopes of cash everywhere you go. As soon as you break a bill, you’re carrying around a fistful of coins as well. Online purchases, sending money via PayPal, transferring money from one envelope to another, and a hundred other things become a hassle once you’re dealing in physical tender.
Before you abandon Uncle Dave’s envelope budget, however, there is a solution.
The Debit Card Envelope Budget
Banking services like Capital One 360 (formerly ING Direct) offer customers a free checking account that can be connected with up to 25 free savings accounts. This way, explain the banks, customers can set up individual savings accounts for specific goals–a vacation, new car, wedding, and more.
Those same accounts, however, can just as easily be set up to correlate with your monthly budget categories. So instead of a new car or college tuition, you’re using those savings accounts for your cell phone bill, insurance, pet food, or anything else that’s in your budget. They are your “envelopes.”
When you’re actually at the register making a purchase, you use the debit card for your checking account. Then, using the bank’s mobile app, you quickly “reimburse” your checking account with money from the appropriate savings account. Pretty slick right?
Just like that, you’ve digitally recreated your envelope budget.
Because you’re using a debit card that’s connected with checking and savings accounts (as opposed to a credit card), you’re bound by the exact same spending limits that you would be with physical envelopes and money. There’s no emotional spending workarounds, no “but I R-E-E-E-A-L-L-L-Y want it” allowances. The same iron-clad principle of Dave Ramsey’s original envelope budget, combined with the convenience of digital.
The other nice thing about using real accounts is that you can set up an extremely efficient system of transfers between them. So if you receive a regular monthly salary (or weekly, or bi-weekly), you can set up your accounts to automatically receive the same amount of money. Want $200 in your “Gas” account every month? Just set up a recurring transfer for the day after you receive your direct deposit.
If you are budgeting with a partner, you can both have access to the same accounts, or you can each get your own checking account, connected to a different set of 25 savings accounts–that’s the potential of having 50 different budgeting categories anytime something new comes up.
There is an entire course on this new digital envelope system, which teaches participants how to set up recurring monthly transfers, bill pays, auto deposits, and a bunch of other hacks to put your monthly budget on autopilot.
At the end of the day, no single budgeting system can wave its hand and bestow upon you financial discipline. There are always ways that you can cheat yourself, and any budget involves willpower. What you can do, however, is at least stack the cards in your favor by setting up a budgeting system that works with your real life.
Hey Dan and Kirstin,
I really liked this post! I’ve started using this idea in the bank and it’s made it easy to spend for each category accordingly. I also like the idea you mentioned about putting in $200 for gas automatically – really ties into the concept of minimizing willpower needed so we can focus on other aspects of life.
I can think of a couple other ideas where this idea can be implemented too. If you’re working full time and freelancing (which you hope will become your FT job), you can separate the two and just use income from one stream for everyday expenses so that you don’t get used to spending from both the job and freelancing incomes.
Automation also comes in handy if you pay monthly rent, so you can automatically transfer rent and not have to cut a cheque for the landlord every month.
Great post, Dan!
Melissa
**Okay, realized my correction was another typo – meant to type in Kristin (apologies!).
Anyway, great post, I’ve definitely found it easily implementable!
Yes! I love the idea of automating to minimize the need to exercise willpower. We often overestimate how much we have 🙂
**meant to type in Kristen, not Kirsten – hands typing too fast!
I use YNAB in the same way as my digital envelope system.
YNAB sums up all your money in your checking account and subtracts what you owe on your credit cards and this is your available balance. You can have as many checking/credit accounts and YNAB keeps track of what is in each category. I love using this system as it allows me to maximize my credit card rewards points and lets me sign up for various checking accounts if the bonuses are sweet enough. I currently have 13 active checking/credit accounts open and I’m never worried about keeping track through the magic of YNAB.
I never use my debit card except to pull out cash because I don’t want to lose out on the any credit card rewards and I’m paranoid of getting hacked. If my credit card gets compromised, it’s a simple phone call to my creditor. If my debit card gets hacked, that’s real money that could be lost!