If you’ve read about thecash envelope systemfor budgeting, you recognize the genius in its simplicity.
The cash envelope system championed byDave Ramseymakes your budget come to life visually and tactile. It helps you see your budget at work and howmuch moneyyou have to spend with the help of envelopes and cold, hard cash.
The basics are this: you use onepaper envelopeperbudget category. On payday, you get cash and stuff each envelope with the money earmarked for that category. When the envelope is empty, you stop spending.
Simple, right? Well, yes and no!
The truth is that a few things make thecash envelope methodclunky.
First, most of us aren’t used to using actual dollar bills and coins. Secondly, many stores prefer cards over cash. And third, most of us get paid by direct deposit, and going to the bank every payday to get some money for our budget isn’t very convenient.
The cash envelope system isn’t as easy to use as the debit and credit cards that we are all used to.
But there is no need to throw the baby out with the bathwater! The cash envelope system has helped many people stay on track with their budgets.
To overcome the clunky parts of the cash envelope system, I found an alternative option, aCASHLESS envelope systemfor budgeting.
Is acashless systemstill effective? (using adebit card, not acredit card)
If budgeting by envelope is to rein in your budget with actual segmented cash, won’t debit cards defeat the whole purpose?
The answer is no. If you spend some time choosing a method and getting it set up, acashless envelope systemfor budgeting can work just as well as a standard envelope system.
A cashlessdebit cardsystem is not only doable; it is simple and effective once you start it.
I will teach you the ins and outs of keeping all the best parts of the envelope system for budgeting using cards instead of cash.
How to set up a cash envelope system
First, you need to understand how to set up acash envelope system(the same for physical or cashless envelope systems). You can skip this section if you already use the cash envelope system for your budget. We will get down to the cashless part next.
Create a budget:
Start by creating yourmonthly budget. We use azero-based budgetin our household. Our budget planning started with writing down ourtake-home payand subtracting fixed expenses. These can be car payments, utilities, rent or mortgage, and financial commitments like credit cards or student loans.
We then assign every remaining dollar a job by allocating it into our budget categories, including grocery, savings, Christmas sinking fund, transportation, and debt payoff (and others). In this post, I share 139budget categoriesyou should consider when creating azero-based budget.
When you finish creating your budget, yourtake-home payminus your expenses should equal zero. Giving every dollar a category and job offers you complete control over where your money is going.
Set up your envelopes:
The next part of a cash envelope system is to create your envelopes. You want a place to hold the specific amount ofphysical cashyou decided on for eachbudget category. You can useactual envelopes like these. I also lovephysical envelopesor wallets andshare some of my favorite options in this post.If you are more interested in the cashless envelope option, I will share how to set up your envelopes fordifferent categoriesin the next section.
Pay your bills first:
When using a cash envelope system, the first thing to do after each payday is to pay all your bills.
Stuff your envelopes:
Use the remaining cash in your budget and distribute the predetermined amount to eachseparate envelope(budget category). As you spend money, use the funds from the appropriate envelope. For example, if I budgeted $400 for thegrocery storeeach month, I would have one envelope labeled groceries and put $400 cash inside. (read below for the cashless instructions).
Yourspending limiton that category must stop once the money is gone from an envelope.
At theend of the month, thebest wayto make the system work is to evaluate your budget, see howmuch cashyou have left, and make necessary adjustments.
Move the unspent cash from your envelopes into savings, use it to pay off debt, or roll it over to yournext month’s spending.
How to set up a cashless envelope system
The same basic principles apply to a cashless envelope budgeting system. You still have specific amounts assigned for eachbudget category, but instead of using actual cash or envelopes, you will be using paper/electronic banking anddebit card(s).
1)There are two options for a cashless envelope budgeting system: All of the money for your “envelopes” will be located in onechecking accountand accessed using the samedebit card.
Your “envelopes” will exist in name only. Using a notebook,index cards, or your phone, you’ll track howmuch moneyyou have spent from each category. Tracking requires vigilant work to keep your spending tracked and current.
ThisBudget Bookwould work great!
OR
2) Create achecking accountfor eachbudget categoryand have your direct deposit automatically distribute your paycheck into the appropriate accounts.
Setting up direct deposit requires some upfront work (and the bank teller might look at you funny). This method is helpful because you can use category-specific debit cards foronline purchasesand automatic payments.
Although you might have eightdifferent accountsfor our categories, you only need to carry around three debit cards each (groceries, business account, and personal account).
Use your bank app to check howmuch moneyyou have in each account, or you could also use paper or your phone to keeptrack of your spending.
If you are unsure which method of thecashless envelope systemwill work best for you, I recommend first trying option number one (with one account and onedebit card).
If you have trouble with the tracking or would like the added convenience of setting up automatic bill pay, try option number two (multiple checking accounts).
The beauty of the envelope system is that there are manydifferent waysto do it. You can try all of them until you find a fit that helps you stay on budget the best!
Pros of the cashless envelope system
There are definite benefits to using thecashless envelope system:
- You don’t need to go to the bank every payday to get cash out of yourbank account
- No worries about forgetting the correct budget envelope
- Spouses don’t have to split some money for overlapping categories like groceries or gas
- Cards are accepted nearly everywhere
- You can use debit cards to set up online automatic bill pay for recurring bills
- There are even nowcashless envelope trackersthat are agreat wayto track yourvirtual envelopesto make sure eachexpense categoryhas enough in it
Cons of the cashless envelope system
However, thecashless envelope systemisn’t all roses and rainbows. Some cons of thecashless envelope systeminclude the following:
- The initial setup will take time (especially for the multiple account/cards option)
- It is harder to keep track of money spent when using paper
- The potential to overspend is more significant with cards instead of actual cash that you can see and touch
Who should not use a cashless envelope system
Beginning Budgeters:
If you start with budgeting, I recommend using the standard envelope budget system until you get the hang of things.
There is something about seeing your money in envelopes (or lack thereof) that helps reinforce the need for this strictbudgeting method.
If, after a few months, you want the convenience of acashless system, you can switch over. You’ll already have your budget categories created, so it should be easier.
Overspenders:
The cashless version of the envelope system is not a good choice for overspenders UNLESS you are very detail-oriented and vigilant. Most debit cards have overdraft protection, so it could get expensive if you aren’t careful to stay within your budget.
Final Thoughts on the Cashless Envelope Budget System
The envelope budget system is a great strategy to get the pulse of yourspending habitsand work towards yourfinancial goals. It puts you in the driver’s seat of your spending instead of in a reactive position.
I love how it helps you keep close tabs on your spending and learn to stay healthy within those boundaries.
A cashless envelope budget system is a modernized version of this original genius idea. If digital tracking is more your style, you will appreciate the simplicity and ease of using debit cards instead of carrying several envelopes with cash inside.
Suppose you are interested in using a cashless envelope budget system. You can do this! In that case, I hope this post has given you a basic understanding of using an envelope system and some creative cashless methods for executing it.
And if you need some extra help, be sure to check out myfinancial coaching services.I’m ready to help you succeed on your financial journey step by step.
