The Envelope System For The 21st Century

There are a lot of people who use the envelope system for budgeting. The idea is simple: you have different envelopes for different things that you want to buy. You put cash in these envelopes and pay for the the items with the cash. Alternatives are the “Jar” system that has been touted by Gail Vaz-Oxlade. (Link goes to Jessie’s Money who uses the Jar system)

I used a modified envelope system in graduate school and it did WONDERS for my budget. I had an envelope for each week. And then 5 envelopes for different yearly reoccurring expenses: Christmas, vacations, contacts, ACS membership and car registration. At the beginning of each month I pulled $500 out of my checking account. I put $100 of it into its respective envelopes and then split the remaining $400 amount the 4-5 weeks of the month. Each Monday I grabbed a new stack of cash for the week. All my debit and credit cards were kept out of my wallet, except for the 1st on the month when I went and got more. Contrary to what Debt Ninja has said, the envelope system actually requires very little discipline aside from the one day a month you have to split up your money. After that it is a pretty easy system.

However, now that I’m “grown up” a little I’ve found that having envelopes around isn’t very practical. Nor is getting cash when your regular bank doesn’t have an ATM in the town. And over time I’ve found that my new method of budgeting is online – and when I take a step back and take a good look at it – it turns out I’m doing the envelope system again. This time online.

Instead of envelopes, I have separate accounts for everything.

In total I have 5 different accounts that I regularly use.

Account #1: Bill paying account. I put in here the MAXIMUM I need to pay for each bills. So if water ranges from $25-40, I put in $40 every month. If the cell phone ranges from $50-65, I put in $65. I also cancelled my cable TV, found cheaper internet and lowered changes on my cell phone to save me some money here. Then after all my bills go through I transfer the remaining money onto my credit card.

Account #2: Every-day expenses. Food. Gas. Ect. Not however for gifts, clothes and entertainment. This account only pays for the things that I NEED every month. Toilet paper. Grocery shopping. Gas to get to work. Oil changes. More on how this breaks down in a minute. 🙂

Account #3: Emergency fund. Since I have debt, I’m currently saving just $100/month. It is small and simple and automatic.

Account #4: Yearly savings I added up all the expenses that I have reoccurring every year: car registration, membership dues, haircuts (I only get this done twice a year, if that!), christmas, vacations, ect. Then totaled them and divided by 12. For me this is $140/month. I save this in a separate savings account. Then I have an excel sheet that I use to keep track of when I spend for this account.

Account #5: Fun fund This pays for all the things that make life nice, but aren’t a necessity. Gifts, clothes, entertainment, dinner at a very fine restaurant. I personally fund this account with my “extra” money. So from tutoring in real life, tutoring online, doing surveys, selling my possessions.

Here is a pictoral representation of where my money goes and from what pay source (if you want a more detailed account of where each dollar goes, you can see my budget):

My Modern Day Envelopes!

So with my modern day envelope system, rather than tucking away $80 or $100 in an envelope for each week, I get three separate “pay days” each month to my discretionary spending account:

1st of the month: $196 (from my full time job)

2nd Friday: $226 (from the community college)

4th Friday: $226 (from the community college)

My friend Okturn Delmoniq has his money set up so that everything goes to his savings account and then each week he gets a transfer of $100 from his savings into his checking. This is exactly the same idea as my envelope system, except you can set up your bank to do it automatically for you.

Another set of “safe guards” that I’ve added is that I get text message alerts to my cell phone. Whenever I get a deposit, the bank sends me a text message. Whenever my balance goes below $50, I get a text. This way I know when my money is available and also I know when I’m getting low and need to watch myself! I also check my account every 2-3 days, just to make sure I know exactly where I’m at.

An added benefit of using different accounts and automatic transfers for your envelope system is that you still have the ability to go back and see exactly what you spent your money on. This is the biggest complaint that people have with the envelope system. But when you set up your online accounts to be like the envelope system you still maintain the ability to know EXACTLY where your money went.

For me, since I only get paid once a month, budgeting week by week is a necessity to make sure that I’m not poor by the middle of the month. Using modern day features available using online banking makes it not only feasible, but superior to the “old school” method of the envelope system.

19 thoughts on “The Envelope System For The 21st Century

    1. Actually it is really, really unconfusing because it is all automatic with my direct deposit.

      ln my wallet have two debit cards.

      Card 1 pays for food and every day expenses.

      Card 2 is for clothes and entertainment.

      Everything else is set up to be an automatic transfer so I never have to worry about it.

  1. Do you end up paying a lot in bank fees? Because of the jar system (and many fewer transactions that resulted) I ended up getting a cheaper package of service fees. Just wondeirng. Obviously, it works for you, so if it ain’t broke, don’t fix it!

  2. I feel like I would have lost my mind with all those accounts, or just forgotten about one. It’s pretty impressive that you have all of those accounts under control. The automatic transfers probably help to. But I definitely agree that your system is the best for someone that get’s paid on a monthly basis. I get paid bi-weekly so I just need to make sure I’m not poor before the next paycheck. Some food for thought, I have about $18 to my name right now…but payday is tomorrow!

    1. Well the bill paying account I don’t have to think about really. I have all of my bills set up to automatically pay every month. So the money gets direct deposited into the account, funnels to all of the people I owe money to automatically, and I never have to worry about it.

      I theoretically could never open this account again until I had a new bill and I would be fine.

      I’m only spending out of two accounts, so really I have only 2 accounts to worry about. One for necessities and one for non-necessities. Since I have drawn a rather clear distinction in my head as to how each gets funded, it makes it very easy to keep track of.

      The savings accounts just gather money until I need them. So I don’t have to worry about checking them except for when I need the money from them – which doesn’t happen regularly.

  3. This is exactly what I do too including the weekly budgeting. the only difference is I withdraw my “fun” money as cash at the begining of the week – i dont’ bother keeping track of it because well, quite frankly i can’t be bothered. besides when it’s cash in your wallet you always know how much you have left for the week and when it’s done, it’s done.

    1. There isn’t an ING ATM in my town, otherwise I would consider doing this. However, as I mentioned in the post, this is exactly what I did in grad school when I only had one checking and one savings account.

  4. Wow, that’s pretty cool. I only get paid once a month so the first week I pretty much tell my money where to go and whatever is left after that week is for my own purposes.

    Btw, love the snow. Isn’t it festive?? 😀

  5. Why you gotta call me out like that….haha. It might not take a lot of discipline to manage the envelope system, but it takes a type of discipline I don’t have. To each his own.

    1. I think you may have hit in on the head there. Each person has different weaknesses and different strengths, so we have to figure out a system that works for ourselves.

      I think it takes FAR more discipline to not overspend on a credit card. If I tried your way I’d just build more debt, I’m SURE of that. =)

      For me it is easier just to have money direct deposited into an account every month and never worry about it again.

  6. I think what you’ve set up is an excellent system!! It’s automatic, and it works for you!! I think it would drive me crazy to be paid only once a month, but how you have everything set up makes it completely doable.

    I agree with you that the jar system doesn’t really take a lot of effort – once you figure out the amounts you want to have in each jar – it’s really only going to the bank 2x a month (for me) that you have to do.

    (thanks for the link love)

    1. I’ve only been paid once a month for the last 7 years, so I’ve gotten used to it.

      I would probably have a minor freak out if I got switched over to twice a month! I have scheduled all my bills to be due in the first week of each month, so changing to twice a month would really put a crimp in that plan! =)

  7. I do a similar thing except I don’t bother having separate accounts. I manage everything in an old copy of MS Money. (Before that I did the same in excel.) Instead of opening one account in there per actual physical account, I open one per ‘budget bucket’. Salaries get deposited into the ‘main’ bucket and then automatically siphoned off into each separate budget category. When I need to pay things off it goes straight out of there.

    The good bit is that I don’t have to run multiple accounts and have money zipping between them. We actually only run two accounts now, and that’s only because we have two mortgages with offset facilities (ie the balance in the account is offset against the mortgage balance, a bit like a line of credit), otherwise we’d have just one. [Correction – we have 3. My partner has his own bank account where his Salary is deposited, then he transfers everything except his spending money to the main accounts.]

    His spending money stays in his own account so (a) he always knows exactly how much he has to spend and (b) so he can spend it without having to answer to me. (I dont have problems keeping track of my spending money in the main account.)

    The only difference between your system and mine is I don’t transfer money out of my buckets every month. I’ve averaged the bills so I know on average we need say $80 a fortnight put in (we get paid fortnightly), it goes up, it goes down, at the end of the year I might do a “sweep” out of the buckets to clear out any excess but otherwise it stays where it is. It doesn’t really matter because for us everything in our accounts is always offset against our debt.

  8. I can definitely understand why you budget weekly! I would have to, too. Right now I get paid fortnightly but still plan out each week by week – much simpler when rent and all other payments are set up that way.

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