A couple years ago, my wife and I started to notice that we were consistently going over budget and spending more money than we set aside each month for our basic spending like food, entertainment, and bills. We weren’t “in trouble” in the sense of not having enough money to pay bills, but the money I wanted to use for specific savings ideas (like a house and vacations) was always missing… hmm wonder why?
Watching my parents throughout the years I noticed that they would always pull cash out of different envelopes whenever we were buying food, going out to a movie, or conducting some activity that required money. As you can probably tell already, my parents were using the “envelope system” for their money management.
The envelope system (sometimes called the cash system) is a very basic and easy way to manage your expenses. You can take it to whatever extreme you desire, but it works basically by living on cash and having different envelopes for each budget item.
So for example… you would have an envelope for food, an envelope for entertainment, an envelope for fuel – essentially an envelope for every budget item you would normally use credit for. You would then budget your money in cash by putting the designated budget in cash into each designated envelope. When the money is gone, you stop spending – thus helping you keep a budget.
If you haven’t tried the envelope system and are having trouble sticking to a budget like I did, you MUST try this system. There is no other method I’ve found that is easier to follow in maintaining a budget than using the envelope (cash) system. I personally use it today and it works like a dream for keeping to a budget, as it makes it very clear when you stepped over from having excess in your budget to debt.
With this concept in mind, I have been thinking of using the envelope system “electronically” instead of in cash. Well… not entirely electronically, but I think you will get what I mean when you read below.
What is an “Electronic” Envelope System?
Simply, I view the “electronic” envelope system as using numerous bank accounts
instead of actual envelopes. I already use it “partially” by having a savings account for my mortgage. I view this bill as highly important, so I transfer my mortgage payment into this account whenever I’m paid to make sure the money is there when the bill is due.
I however don’t have any other savings accounts set aside for my other bills. I do however have another savings accounts for my emergency fund and my “fun money”.
My thoughts right now are to create 6 more savings accounts for the following expense areas…
- Student Loans (yes, I still have these)
- Car Loan (yes, I have one)
- Energy (Water, Electric, and Gas)
- Giving & Blessing Other (Charitable giving to various organizations and tithing to my church that I include in my budget)
- Cell Phone (I hate this bill, but can’t live without it)
- Other (Not yet determined what I will use it for…)
Then after these accounts are set up, I’m thinking of running my “electronic” envelope system in conjunction with my rewards credit card. By combining the two, I think I can stay out of debt, pay my bills, and get a bonus in rewards points.
How will this work?
To make it work efficiently, I will move these bills to my rewards credit card (won’t work for all of them) to have them paid automatically or when I determine the payment date. I will also auto transfer my budgeted money for each expense into the appropriate account so that I am certain it is there when I need it.
When the credit card bill is due, I will then pay the bill out of my numerous accounts. This should do three things I find valuable. First, I will not go into credit card debt on my rewards card as the money will be in my designated savings accounts. A big plus for me!
Second, I’ll have a good handle on the rest of my cash, so I can use “selective spending” to manage it and maintain my budget. With this leftover cash not in savings accounts, I plan to still use the envelope system for my food and entertainment.
Thirdly, I will gain extra rewards points that I can then use for other purchases such as airfare and other goodies… I for one love reward points and redeem them regularly for travel rewards and many times cash!
Well, with all this in mind, I’m interested to know if anyone else uses this approach or something similar. I can’t really think of any negatives to this, other than the time to manage it – which I personally don’t find cumbersome at all.
Readers, what do you think? Do you do something similar to the “electronic” envelope system? Am I a fool to even think of it?