Budgeting Money Tip: Cash Envelope System Meets the New World
Credit and debit cards can lure you into spending frenzy that can spiral out of control before you know it. Have you ever come to the end of the month and asked, “Where did all the money go?” The convenience of plastic has made it far too easy to make purchases that we might not make if we had to dip into our wallet and make a cash purchase.
Studies have shown that spending increases as the means to pay for an item becomes easier. In other words credit cards have made buying transactions easier, so we’re more likely to buy stuff without concern, until the bill comes at the end of the month! Likewise, new ‘pay with a wave’ credit cards will make it easier still and foster even more poor spending habits.
I’m a big believer in the notion that cash is king when it comes to paying for items. If you don’t have the cash, you can’t afford the item and shouldn’t buy it. Traditional means of budgeting to help curb spending is the Cash Envelope system. But there are clearly some disadvantages of that. There’s also a 21st century version of the Cash Envelope system called Virtual Envelopes. We’ll explore how you can implement a Virtual Envelope system using your budgeting worksheets.
Traditional Approach: Cash Envelopes for all your Spend Categories
One past useful money budgeting technique was to set up your saving and bill paying system using cash envelopes. Basically the cash envelope system consists of keeping separate envelopes for your spending categories and populating them with cash from your income source. Then when a bill comes due or you need to go shopping for food or an item you need, you simply pay for it with cash from the appropriate envelope.
The big advantage of cash envelopes is that, if you budget properly, you will always have the cash to pay a bill when it comes due. No more worrying about where the money will come from, be it for mortgage or rent, utilities, car payments, repairs, taxes, discretionary spending, etc.
However, there are many disadvantages of this old technique in keeping all that cash around. It’s cumbersome and simply not safe as you can easily accumulate hundreds or thousands of dollars in your cash envelopes. Just imagine the heartbreak and financial setback should something happen to all that cash.
Alternative Approach: Use Virtual Envelopes for most of your Spend Categories
In today’s electronic world, there’s a version of the envelope system that can take the old proven approach and revamp it for the 21st century: Virtual Envelopes. Built on the solid foundation of the Cash Envelope system, Virtual Envelopes works seamlessly with your existing cash envelopes and your budgeting worksheets. The only difference from Cash Envelopes is that for some budget categories you will now deposit the cash into your bank or credit union and manage those categories online, or “virtually.” Hence, the term Virtual Envelopes.
When you deposit money from your income source, you simply allocate the appropriate dollar amounts to the budget category accounts, based on your spending plan or budgeting worksheet. It’s easy to move money around your various spending categories or budget category accounts whenever you need to. When a bill comes due, you simply transfer money from the budget category account to your checking and then electronically pay the bill. It’s easy and extremely fast once you set it up through your banking institution.
Virtual Envelope Advantage #1: It’s Easy to Get Started
To get started, ask your bank if they can set up your Virtual Envelope budget categories as sub-accounts underneath your savings account. There should be no charge for doing this. If your bank will not provide this service for free, check around for other financial institutions in your area, including your local credit union. I’ve done virtual enveloping for about 30 years through a couple different credit unions. I’ve also had a couple colleagues using this approach. So don’t take “sorry, we can’t do that” as an answer from your existing financial institution.
Additionally, set up your savings, checking and the sub-savings accounts to have internet-access via your home computer, free of charge. This will allow you the convenience of budgeting and bill paying from the comfort of your home. If you are uncomfortable using internet-access for banking purposes, there are just a couple things to be aware of and you will be fine. First, only use a reputable bank or credit union. They have the best security in place for all of your data access requirements. Follow their password guidelines and change your password regularly. In my book, I dedicate an entire chapter to Virtual Envelopes and how to set up your sub-accounts.
Virtual Envelope Advantage #2: Works Hand-in-Hand with your Cash Envelopes and Budgeting Worksheets
Has the cash envelope system gone the way of the dinosaur? No! I still recommend it for all of their budgeting categories for children and for the cash spending categories for adults, such as food and walking around money.
Virtual Envelopes can co-exist with Cash Envelopes just fine. Use the Virtual Envelopes for those monthly expenses that you would normally write a check or electronic payment. Examples would be mortgage/rent, taxes, car repairs, utilities, savings, debt pay-down, etc.
Our budgeting worksheets incorporate the strategy of using Virtual Envelopes and help you set up your accounts accordingly. We define auto-pay, e-check, and other banking terms that will guide you to set up your Virtual Envelopes effectively in managing your monthly budget.
Virtual Envelope Advantage #3: Safety, Convenience and Flexibility
The biggest advantage of Virtual Envelopes is that your money is safe in a banking institution instead of cash in envelopes in your house. Just imagine if you had a robbery, fire, or just plain old forgot where you put that cash envelope with your rent payment. Not a fun time trying to recover that!
With Virtual Envelopes your money is not only safe but you can access your accounts any time from the convenience of your computer at home. You will be able to see the account and sub-account balances for each of the budget categories. You will also be able to move money from one budget category to another when necessary and also move money into your checking account when it’s time to pay bills.
What could be better? Virtual Envelopes are based on the proven fundamental budgeting technique of Cash Envelopes, but thanks to modern technology can now provide the ultimate safe, convenient, and flexible solution for your monthly money management.
Your Next Step
Any time of the year is a great time to take inventory of your current financial position. Check out Virtual Envelope resources including our Personal Finance book and corresponding Budgeting Worksheets and put Virtual Envelopes to work for you. At our blog, you’ll find a whole host of articles that will help you get started. If you need one-on-one coaching, we can help you with that too with our personalized Budgeting Coach. It will be well worth the investment of your time.
