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The Modern Envelope Budgeting System
Budgeting with an “Envelope System” but with a modern twist
How do you decide on where to put your money? You want to save but you also want to live a little. Don’t forget bills! And what do you do with expenses that you are anticipating?
There are so many budgeting systems in place, why do you need yet another one? My budgeting system is not really a new concept. Its been around for a long time. Zero-based budgeting and envelope budgeting have been espoused by many personal finance experts and for good reason: it works. However, as we move to a increasingly digital and cashless society there are many drawbacks to those systems. I found that they didn’t totally work for me. Almost but not quite. And its that “not quite” caveat that makes the budgeting fail.
I do have a disclaimer to add: if you are truly terrible at money or have an addiction of some sort that makes using credit cards and online shopping risky: DO NOT DO THIS! This is a system that works for me but I also don’t really have any major issues that make budgeting supremely difficult for me. I am just poor and busy. I don’t have time or energy to spend too much on budgeting or tracking my spending but I also don’t need to dig myself out of a huge pile of debt because of overspending or addiction. If you find that you are not like me, please check out some other great and amazing personal finance sites that that can really help you and find a budgeting system that works for you.
Anyways, after all the caveats and disclaimers. This is how I adapted the zero-based budgeting and envelope budgeting system into a more modern system.
I call it the Modern Envelope Budgeting System.
The best way to budget your money is to decide before you receive it where each dollar will go. This is a combination of various budgeting system- and it works!
This is a cash budget which means that you can only spend money you actually have. Some financial advisors will tell you to only use actual cash or direct deposits but I see no harm in using a credit card AS LONG AS THE MONEY NEEDED TO PAY FOR IT IS ALREADY IN YOUR ACCOUNT. I still recommend, unless you are great at self-control and are very good at keeping on top of the amount in your account, to use cash for discretionary spending- food, splurges etc.
The best way, in my opinion, to keep track of your money is to divide it into separate categories as soon as you get it. Some will tell you to take out the money and put it in a labeled envelop, hence the term “Envelope system” but in the modern era I suggest you open several sub accounts and just deposit the money in there.
CapitalOne360 for example, allows you to have many savings accounts that can be named whatever you want and can be accessed easily from your computer or phone. You can transfer money directly from your main checking account, so it’s easy to divide your paycheck. However, you can only withdraw 5 times a month from each savings account so keep track. If you do put purchases on your credit card, pay a bunch at a time, instead of each individual transaction so that you don’t use up your withdrawal limit.
Each person will have their own categories but here are some basic ones that I will discuss:
Basically, you divide your paycheck every month (or 2 weeks) into these categories and transfer them into the corresponding accounts. Some will be a fixed amount monthly and some will percentages.
So… this is how it works….
Charity- 10% right off the top. No need to think about this one. Put it another checking account or savings account and you can give it out as needed. When there is money in your Charity account you can feel comfortable giving a decent donation to a charity of your choice or be able to sponsor your niece in her ride-a-thon or give to a friend in need.
Savings- This should be approximately 15% of your paycheck but you should try to make it as high as possible, especially if your bills are low. It should definitely be more than your splurge or clothing account. You take this money and put it wherever you are on the Savings Ladder. (If you are working on emergency, you put it there, if you are up to retirement you put it there etc.) Please notice how you put the 15% immediately into your savings account (envelope) when you get your paycheck. You don’t put your leftovers in your savings account- this is what PAY YOURSELF FIRST means.
Bills- Take all your bills and add them up. If they sometimes fluctuate round up from an average month. Put that amount in your bills account. If there is leftover at the end of the month, it rolls over so when your electricity bill is higher in the summer, you have some extra money in the account to cover for it. The best part of this system is that when you get a bill you already have the money in your account to pay for it. No playing catch-up! No need to worry about whether you will have enough for a slightly higher bill. It is already in your account, just waiting for that bill to come. Talk about removing stress from bills!
Transportation- Take your gas bill or bus costs and figure out how much you spend approximately each month. Put that amount each month into an account and roll it over if there are leftovers. This makes sure that if one month you use more gas than you have extra money in the account to pay for it. If you have fixed transportation expenses, i.e. bus card, then you can combine this with your bills account.
Regular Maintenance- If you own a car or a house you should also put some money in here for maintenance. If you put in a small amount each month then when you need maintenance done on your car or home then you will have the money for it. Car problems don’t need to mean an emergency. (Although I am using a car and home as an example here, you can set up accounts for anything that you have that needs regular care).
Coming soon- This is the account that is for very short terms savings. You can also call this a holiday account. This is for things that come up every once in a while but not regularly. Examples are holidays, birthdays, weddings, and semi-big purchases that you will need or want, ex new computer or phone. Saving for these things mean that you don’t have to borrow or put money on a credit card when these expected expenses come up.
Clothes- This is the same idea as the “Coming soon” account. Put aside money each month for clothes, shoes and accessories. Although you may not shop each month, the money rolls over so you can shop freely when you want. This can also help you take advantage of sales- during an off-season you can buy clothes on sale without guilt because you have the money put aside for it!
Food/Discretionary- This account is for all the food, toiletries and day-too-day spending. This money can stay in your checking account because this is the money that you are spending every day. Again, if you have leftover money, roll it over into the next month. Having a set amount to spend on these items will make sure that you stay within your budget. When the money is running low-stop spending!
Splurge- This is the last account to be filled and the first one that gets cut out when things get tough. Obviously, each person will have a different idea of what gets paid from the splurge account, but this is the account for fun. This account get filled LAST. Although it is important to have “fun” this should not come at the expense of your financial security. Don’t skimp on savings, maintenance or bills for a little fun, especially when there are so many ways to have fun or take care of yourselves that are cheap or free. When you run into financial difficulties or are expecting a big expense and you don’t have enough saved up- this category should be the FIRST to go.
These are just examples of some of the accounts that I have (I also have one for property taxes and building fees, as well as some others) and each person will decide which accounts or envelopes they need. You may have accounts that change over time and you may need new ones as your needs evolve. The point is to have money to cover all your expense and anything that may come up. Planning for events and purchases that are bound to come up will leave you with security in knowing that the money you need is set aside.
This system is not new, it has been around for a while. I suggest (as written above) utilizing different online account instead of having actual envelopes which may got lost.
The most exciting part of using online savings accounts for some of the lesser used categories:
Interest! That’s right! for example, Capital One gives you interest on these savings accounts which means that your bill money can potentially MAKE you more money while waiting to be used. It won’t be a lot but every little bit counts!
The second exciting thing is Credit Cards. Many credit cards give great cashback or rewards for suing them. If you put a bill on your credit card THAT YOU ALREADY HAVE THE CASH FOR IN YOUR ACCOUNT you can get point and cashback while still staying out of debt and in control of your spending.
The Modern Envelope System!
Read more here about budgeting with an uneven paycheck.