The Envelope System For The 21st Century
December 9, 2009 19 Comments
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):
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.