I think it is about time your grandmother, Larry Burkett and Dave Ramsey migrate into the twenty-first century. Ah, the old tried and true envelope system. The simple idea of budgeting by putting your cash into actual envelopes and, gasp, when the money runs out the spending stops (SNL) . With the introduction of connected smart phones and instant access to online banking, the concepts of envelope style cash flow planning are now conveniently available for free to all Americans.
So, with all the ways to keep up with transaction and financial systems, why would anyone use envelopes? I believe the beauty of the envelope system lies in its simplicity and transparency. The system allows you to make one set of decisions at the beginning of the month and then you don’t have to keep receipts or track of anything; simply spend the money you have in your envelope. If you run out, too bad, plan better for next month. Or at least have a conversation with yourself or spouse and figure out where the money you need will come from. The second most useful idea of using envelopes is the fact that, especially if you share a budget with others, it is quite easy to see if there is money left for something. You don’t have to keep track of every dime you spend, but you can quickly open up an envelope and see if you have money to go out for dinner at the end of the month. As long as you can agree on the amount that goes into the envelopes, you don’t have to worry about overspending.
However, there are a few drawbacks to the traditional system. My wife and I used literal paper envelopes for the first few years of our marriage (and still do for entertainment and groceries). It actually really helped get a complete, tangible grasp on exactly how we were spending. Occasionally, it did become annoying or inconvenient. We preferred to simply carry a debit card around instead of hundreds of dollars in cash. Also, it became arduous if we were away from each other because sharing a set of envelopes can be difficult. Even little things like buying gas (not at the pump) or the hassle of forgetting an envelope were minor inconveniences. The great news is that all of these issues are alleviated with the modern day digital envelope system.
There are a lot of fancy online systems out there that will provide ornate apps and a pleasant interface. Companies like Mvelopes and NeoBudget are great, however, what must be said is that there is a better, free alternative that my wife and I have been using for several years! I might even go as far to say they are better than free because they pay you interest and have nice signup bonuses even if you are just testing them out. We currently use a combination of Mint.com and Capital One 360 and two old fashion real envelopes.
How it works:
The first step almost seems too obvious but I’ll go ahead and talk about it. The first step is deciding how you want to spend your money. When you are first developing your spending muscles, deciding what you are going to spend before the month can be paradigm changing for most. The vast majority of people look back, if they even look at all, and try and figure out where their money went. By just deciding where you actually want your money to go is a great place to start. Once you know how much you want to spend for every category the logistics are not complicated.
Again I’ll extoll the simple but wonderful concepts of sub-accounts that Capital One 360 (Formerly ING Direct) allows you to have. This allows you to allocate large categories you would like to save for long term items or sinking fund accounts for big ticket purchases like your next car or annual insurance premiums. These help keep money separate and get rid of the temptation of having a huge pile of cash right after a paycheck.
We get our paychecks deposited into our Capital One 360 Checking Account and we set up automatic transfers for each of the savings sub-accounts (like digital online envelopes for new cars, giving, annual insurance, and vacations). The rest of the money remains in the checking account and is allocated using Mint.com.
Mint.com is a free resource that has been developed by the makers of Quicken. It is a tool that automatically syncs with your bank account and categorizes all the transactions you make. At the beginning of the month Mint lets you choose how much you would like to spend in each category. Every time you make a purchase with your debit or credit card it automatically deducts that amount from the category. This can be seen on your smart phone app or any web browser. The beauty of this process for me is that I can check and see from my phone, updated in real time, exactly how much money we have left in each category.
If you have ever thought about trying the envelope system, now is the time. It is a cool system that, once in place, manages itself and allows for simple tracking over time. It makes you much more aware if you, or your spouse, have a tendency to overspend. Even for individuals who don’t like updating or checking the apps you can set email alerts to remind you when you are about to run out in a category.
I have enjoyed bringing your grandmother’s financial concepts into the modern era. It’s finally free and easy to try out. If you have any questions or use a similar system let me know in the comments.