The Digital Budgeting Envelope System "Get Started" Guide - wealthyish.com (2024)

*This post has been reviewed by an Illinois Registered CPA. However, when making important financial decisions, it's best to speak with your financial advisor.

Last Updated on May 29, 2021

Budgeting is vital to achieving your financial goals. Once you have created the budget, however, what is the best method for holding yourself accountable? The envelope system is the perfect way to keep you from overspending. Using an envelope system can be extremely beneficial to helping you stay on track. The use of cash envelopes can occur physically or digitally. This article will examine why it’s important to budget, the pros and cons of each envelope system, and how you can make it a part of your everyday life.

Why should you budget?

Budgeting is essential to achieving your financial goals, which may include items such as paying off debt, saving, and investing. To be truly intentional with your money, you should budget monthly with an accountability partner that will help you make decisions based on the financial goals you have set for yourself. Your budget should give you power over your money by determining beforehand how you will spend it. How can you create a budget? Follow these steps:

1. Record your income.
2. Record your bills, expenses, and savings using a budget tracker.
3. Track your money throughout the month.
4. Repeat this process every month, making adjustments as needed.

Budgeting is most effective when you are actively involved in the monthly planning and tracking of your money. Tracking money can be time-consuming, which is why many people use the envelope system to help them out.

How can the envelope system help you budget?

The envelope budgeting system was originally designed by Dave Ramsey the founder of Ramsey Solutions and author of books and programs like Financial Peace. This system is a way to keep track of your money by using envelopes that hold cash which you carry everywhere. After you set up your monthly budget, you place specific amounts of money into several envelopes labeled according to your budget.

An example is that if you had decided to spend $300 on groceries for the month, you would withdraw $300 from your bank and place that into an envelope marked “Groceries.” You would then only spend that amount on groceries for the entire month. You would designate more envelopes for expenses such as gas, clothes, eating out, personal spending, and anything you deem necessary.

Most likely, this money would not be used for things you do not or can not pay for with cash, such as bills or online services. According to Pennies Into Pearls, the top 6 Cash Categories to get you started are groceries, miscellaneous, fun, clothes, medical/dental, and Christmas, for example.

How can you set up a cash envelope system?

1. Create your budget.
2. Determine which budget items you will carry in cash.
3. Label your envelopes.
4. Get cash out of the bank.
5. Place cash in envelopes and carry them with you to spend as needed.

Why should you use the cash envelope system?

There are several benefits to using the cash envelope system. One benefit is that this is a great way to receive quick feedback about how much you have spent and how much you have left to spend on various categories throughout the month. One glance into each envelope should tell you where you stand with your cash – and whether or not you can keep spending. Hopefully, this will keep you from going over budget!

Another benefit is that this is a very cheap system – it can be as cheap as a few envelopes. You could even potentially use the cash envelopes that you receive at the bank – making it free!

A third benefit – and possibly the most important – is that you will most likely spend less when using cash rather than a credit or debit card. According to Shift Credit Card Processing, consumers will spend up to 83% more when using a card v. cash. That is a huge saving and will really boost the progress of your financial goals!

What are the challenges of the cash envelope system?

The cash envelope system does have a few drawbacks. For example, it is typically rather timely to set up. Many people do not want to spend their time driving to the bank and waiting in line to get large amounts of cash.

Another negative is that some people do not feel comfortable carrying large amounts of cash on their person. It can be intimidating to carry hundreds of dollars of cash at all times just in case you need to use it.

Using cash as your main spending source can also limit your spending online, which can be a problem if you are using grocery curbside services or websites like Amazon. Using cash will cut down on the convenience that online shopping offers and make it confusing. Some people have a system for this, but people often just quit trying to use envelopes because they do not find it worth the trouble.

It has been a little more challenging to use cash during the pandemic since many people are shying away from any type of physical contact with others, including exchanging cash. Some people may be concerned with how dirty money is and whether it is sanitary to be exchanging it with people.

Lastly, although credit cards are frowned upon by people in the Dave Ramsey community, if you do commit to using cash, you may be cutting out the number of rewards you could potentially receive from credit card use. However, if you tend to overspend and have a lot of debt, you may have to weigh the option that credit cards may not be worth it.

How can I make the cash envelope system work for me?

If you are concerned with how this can work for you, here are some tips and strategies.

1. Ask your bank to help you out. Write down the exact amounts of money you need for each envelope before you go to the bank. Go to the bank and politely ask if you can withdraw money in specific increments. Send your notes with the amounts you would like in each envelope to the teller or send it through the carrier at the window. If the bank is kind enough to prepare the money for you this way, it will greatly shorten the amount of time it takes to put your envelopes together.
2. If you feel insecure about carrying this money with you, try to plan to have the envelopes with you and have this trip be the last of your errands. If it is a greater amount of money than you feel comfortable carrying, you can head straight home. You may also consider investing in a small safe to store the money at your house so that you feel more secure with the cash.
3. If you feel burdened by the envelopes themselves, you can order wallets with envelope inserts online such as these. You can also plan your trips with envelopes carefully so that you only carry a little cash with you at a time. For example, if you are going to the grocery store for one week’s worth of groceries, determine beforehand how much you will be spending and only take that amount of cash with you. Not only will you feel more secure, but hopefully, you will also stick closer to your budget!

What if the cash envelope system is not for me?

If you choose not to use a cash envelope system, a digital budgeting system may work better for you. There are many online programs, such as Qube and Goodbudget, or your personal bank’s budget tools.

What is Digital Envelope Budgeting?

Digital envelope budgeting is a way to separate your money virtually into online envelopes. It is similar to cash envelopes in that you set up your budget, determine how much cash you need in each, and then use the amount in each as motivation to not overspend in that category. It is different in that you do not actually carry the physical cash with you. You can complete this system by using tools your bank may provide or using online programs that sync with your bank account.

How can you set up a digital envelope system?

1. Create your budget.
2. Determine where you will store your digital envelopes.
3. Place the budgeted amount of “cash” in each digital envelope.
4. Spend and track the money as necessary to avoid going over budget.

One example and method of digital envelope budgeting is the use of the Capital One 360 bank accounts – which allows you to have multiple digital envelopes (25) available for your use within one bank account. You can title them and fund them for the correct amount of money you will need for that particular month. This article by Creating My Happiness does a great job of explaining how this system works. It allows you the use of envelopes without the hassle of having to carry cash.

Many banks offer online budgeting tools, such as Chase, Bank of America, Wells Fargo, Citi, and USAA, among others. These tools offer a version of online envelopes that you can manipulate and use each month to track your spending. These are great because they are already linked to your account, so you don’t have to allow an outside source in.

A third example of digital envelopes is the use of apps such as Qube and Goodbudget that allow you to set up your envelopes and track your spending. The Qube app/system and card, for example, allows you to spend only once you have physically transferred the money you need onto the card you will use at the store or online. This is nice because it allows you to not have to worry about how you would spend your cash online. Goodbudget allows you to set up the envelopes without linking to your bank account directly, which some people may like because of security reasons.

What are the advantages of the digital envelope system?

A digital system is incredibly effective because it allows you to keep track of how much you have spent in each category of your budget online, rather than carrying cash with you. With a little planning, you can set this up without even leaving your home and spending time at the bank. This is a great way to safeguard your money (and health!) as well, especially if you are concerned about accidentally losing the cash while you are out and about or being in contact with too many people. You can also hold yourself accountable to your budget by tracking online rather than by checking on your cash envelopes.

Digital envelope budgeting works because it is seamless in terms of how you are spending online. People who may find cash to be inconvenient will not have to worry about this – especially since we are moving towards paying for almost all services online with as little contact as possible.

What are the disadvantages of the digital envelope system?

The disadvantages of the digital system are that it may be easier to spend money with a card rather than cash. Once again, the statistic “according to Shift Credit Card Processing, consumers will spend up to 83% more when using a card v. cash” will ring true. Will you have enough self-control to really say no when your digital envelope runs low? If it were cash, you wouldn’t be able to purchase because there would be nothing left in the envelope. When things are all online, it will be much easier to take from other “envelopes” or transfer from savings.

Another disadvantage is that if you do not check-in and track your envelopes often, you could potentially overspend in one or more categories. Much of the work of cash envelopes is front-loaded, but once it is completed, it is easy to see when and if you are running out of money. Online envelopes are different. There is a little bit of work upfront, but more so throughout. If you do not track how and when you are spending in real-time, you may not realize that you actually didn’t have enough money left in your envelope.

How can I make the digital envelope system work for me?

Take some time to research your different digital envelope options to determine what the best system is for you. Try them for a month or two, and if they are not working, try a new one. Give yourself grace, and do not give up before you are able to see the real results of using envelopes.

When using the digital envelope system, it is important to set aside specific times throughout the month to rectify your budget. Set an alarm on your phone to remind you of your budget “date,” and make sure you stop what you are doing to track your spending.

It is also beneficial to have your digital envelopes with you at all times much like you would have cash envelopes. If you are out and about while you are spending (and before you make a purchase), make sure to check in with your envelopes so you can determine if you have enough money left in them to spend. In this way, hopefully, you won’t overspend.

What are my options if I choose not to use an envelope system?

Other options besides the envelope system are to use budgeting apps, such as EveryDollar or spreadsheets, in order to set and track often to make sure you do not go over budget during your spending time period. This method works wonderfully for many people but can be more difficult if you are not as disciplined at tracking your budget. It is not as easy to quickly assess how much money is left in each category for the budget period using this strategy.

I’m Ready to Get Started Using A Digital Envelope System – What’s best for me?

The envelope system is a proven, highly effective technique for keeping you motivated, on, and under budget. There are many pros and cons to using both cash and digital envelopes. Some questions you can ask yourself to better figure out this process are:

• How much time do I have to set up and maintain this system?
• Do I shop more online or in-person?
• Would I feel comfortable carrying cash in envelopes while out?
• Will I be tempted to spend more if I use a card rather than cash?

Consider these questions when trying to determine what route is better for you. If the answers to the questions do not provide you with enough clarity, trying out both systems can help you to determine what works best for you.

Remember that no matter what system you choose, there will be a learning curve that requires some time. Despite the differences between cash and digital envelopes, the fact that you are building budgeting habits will help you be extremely successful with your financial goals in the future.