How to Effectively Use the Digital Envelope Budget System

Do you love the envelope budgeting system, but you are more of a digital person? Fortunately, there’s a way to use the same system, but digitally. The cash envelope budget system helps millions of people stay within their budget and stop putting themselves into debt.

The digital version of the envelope system helps you stay within your budget without overspending and without the need to carry cash. Whether you use the cash envelope system now and want to convert or you are just starting out, keep reading to learn how the cashless envelope system can help you.

What is Digital Envelop Budget System

It is a budget system where you keep money in different bank accounts (make pretend envelopes) where payments are made for a variety of monthly expenses.

How Digital Envelop Budget System Work?

The digital envelope budget system works in a similar fashion as the cash envelope budget system only that cash is deposited in bank accounts. You create a budget for each category and set up accounts for each category (we discuss this in detail below).
You then transfer the appropriate amount of funds to each account every month – these are your ‘envelopes.’ It’s then up to you to track your spending from each account to make sure that you spend appropriately and don’t go over budget.

You can have as many or as few envelopes or accounts as you want. Just remember that you’ll have to track each account. Many people find it best to simplify the categories with the 50/30/20 budget. This is how you will allocate to different categories:

50% of your after-tax income is allocated toward essential expenses like mortgage payment or rent and groceries
30% goes towards personal expenses like entertainment, restaurant and gifts
20% is allocated toward financial priorities for instance savings and debt repayment

Suppose your after-tax income is $3,700 per month. This is what your budget might look like:

$1,850 in your essential needs envelopes.
$1,110 in your personal wants envelopes.
$740 in your envelopes for financial priorities.

This is just for clarification purposes only. You are free to divide it up however you want.

Categories of digital envelop budgeting system

Each person will have different budget categories as it’s based on personal preference, but the most common categories include:

House payments
Groceries
Personal loan payments/Credit card minimum payments
Saving for retirement or a kid’s education
Daycare services
Kids activities
Gas/Car maintenance
Entertainment/Restaurants/Gifts

Because the digital envelope system is a little different than having envelopes in your possession, you may want to lump some of your categories together.

You may have one account for housing, one for bills, one for groceries, and one for dining out/entertainment.

But you must figure out where each category will fit. For example, car maintenance, daycare services, and gifts all need to be a subcategory in one of your main accounts if you don’t have separate accounts for each.

You can decide which bills get put into which envelope. Just make sure you keep track of it somewhere so that you know which account to use when you need to spend.

Open A Bank Accounts

This step is crucial. You must open bank accounts for each of your ‘envelopes.’ Many banks offer free savings accounts that you can use for this purpose.

We recommend opening at least 3 or 4 free savings accounts. Make sure they also offer online banking and a debit card that you can use to make the payments.

Once you open the accounts, give them nicknames according to their purpose, such as:

Rent/mortgage
Monthly bills
Groceries
Gas/Car maintenance
Dining out/entertainment

Once you create the bank accounts and categorize the expenses, total up how much you need in each account. This is the amount you’ll transfer to the individual accounts each month. Make sure you transfer the appropriate amount each month so that you are able to stay within your budget and can accurately track your spending.

Track Your Spending

Now comes the important step – tracking. This is where the true essence of the cash envelopes for budgeting shines.

If you don’t track your spending, you won’t know where you are falling short or overspending. Since you don’t have physical envelopes with cash in them, you must use an electronic method to track your spending.

Examples of the Best Budgeting Apps to Track Your Spending are the Following:

Mint: An app that permits you to connect your bank account and credit card to track expenditures
You Need a Budget (YNAB): A shared budget app that connects your bank account and to an accountability partner who forces you to spend within your limits.
Mvelopes: It’s an app that asks you a question upon signing up and then forces you to spend within your means to meet your goal.
Buddi Budget: A simplified personal finance budgeting program for newbies
Budget Pulse: A personal finance software that can be used to establish saving goals and lets other people contribute.

It’s important to track every expense you have throughout the month. Once you use up the funds in an account, you should stop spending in that category.

While your housing and bills category may be perfectly budgeted, you may find that you have trouble in the personal or ‘fun money’ category. Pay close attention to what happens every month.

If you regularly find yourself going ‘over’ in a category, it’s time to revisit your budget and spending habits.

Why People Like Digital Envelope Budget Systems

People like the digital envelope budget system because they can continue to carry on with their finances the way they are used to without having to deal with cash.

With numerous envelopes lying around and always having to find the right one, it can get cumbersome. The cashless envelope system simplifies the program while still allowing you to get the most out of the envelope system.

The digital envelope budget system works best for those that do a lot of shopping online. It’s much easier to track your expenses that way.

This goes for your regular expenses, too, such as health and beauty products, groceries, and household items.

Buying from places like Amazon, Walmart, and Target.com helps you keep track of where you are spending. You don’t have to worry about writing down your cash expenses every time you make a purchase – the data is there for you in your bank statement.

Pros of Digital Envelope Budget System

It’s risk-free – It doesn’t cost anything to set up free savings accounts and you can easily keep track of your spending in real-time

You can buy things easily – Shopping online or even in person is simple with the use of the appropriate debit card, just make sure you have them labeled for easy tracking

You don’t have to worry about cash – Shopping online with the cash method is hard. You have to deposit the cash in your account and then make the purchase. That’s tedious. The cashless envelope system already has the money in the account ready for you to spend whether you shop in person or online.

No need to worry about carrying cash – Some people don’t like to carry cash. They either worry about their safety or that they’ll overspend because the money burns a hole in their pocket. With the digital cash envelop method, there’s no cash and you know exactly how much you have at any given moment.

Available 24/7 and saves time – you can make purchases online without leaving your home.

Cons of Digital Envelope Budget System

It is easy to spend money – Swiping plastic makes it easy to spend money in person or online. This can be risky for those that like to spend before they think.

Easy to overspend – It can be tempting to ‘borrow’ from one account to overspend in another. At the end of the month, though, you may find yourself short in certain categories, which is why keeping separate accounts and careful track of what you spend in those accounts is crucial.

It’s easier to pay with plastic than cash – Most people find it easier to overspend when using plastic to pay. Without handing over physical cash, you may overspend without even realizing it. You have to be very in tune with what your app or budgeting software says about each account in real time.

Differences Between Digital Envelope Budget System vs. Cash Envelope System

In truth, the difference between the electronic and traditional cash envelope system is obvious – where you store your money.

With the traditional method, you carry cash in envelopes for every expense you make. You must deposit your cash in your account if you have to write a check or pay a bill online.

Also, if you shop, you pay in cash, and you must write down or track the expense right away so that you know where your money is going.

The electronic cash envelop budget method makes things a little easier. There is no cash to carry with you. It sits in a designated account, which you open (hopefully free accounts).

You label your accounts for each category and spend accordingly. All expenses are automatically tracked for you in your bank accounts. However, you should still re-enter the information or use an app that works directly with your bank so that you have real-time results regarding your budget and balances.

Related reference: How to budget for the first time

Which Budget System is Better?

Both the traditional and electronic budget version has its own benefits. Which is better depends on the way that you live. Do you pay your bills online and do most of your shopping online? Then the digital system will work well for you.
If you are more of a pencil and paper type person that doesn’t like doing financials online, then the traditional system may work better.
In general, the older generations prefer the original method and millennials like the electronic version, but you’ll find some mix-up throughout.
Some people are just digitally-minded while others prefer to write everything down and pay in good old-fashioned cash.

How To Make The Cashless or Digital Envelope Budget System Effectively Work?

The cashless envelope budget system does work if you are dedicated to tracking every expense that you make. You must also be dedicated to using debit cards and/or shopping online for many things.

If you are unsure about being 100% one way or the other, you can try a hybrid method. This way you have the best of both worlds – cash when you need it and digital accounts for your other spending.

In order for that to work, though, you must know beyond a doubt what you have to spend cash on and what needs to be electronic. For example, if you pay all of your bills online, you could keep that part cashless.

But if you prefer to shop for groceries in person, you may want to do the cash envelope method for food and entertainment. Some people find this helpful because they can avoid overspending in the two categories that it’s so easy to go over budget on.

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What is a Cash Envelope Budget System?

The cash envelope budget system helps you track every dollar you spend by category. The traditional envelope system requires you to place your money in envelopes based on the category, such as rent, groceries, and gas as a few examples. At month-end, you tally up how much money you have left in each envelope.

If you find yourself without money at any point during the month, it’s an indication that you spend too much in that category and that you must budget again.

How to Reach Your Goals Using Cash Envelope Budgeting System

Using cash envelopes for budgeting is a great way to teach you how to budget your money. It may seem harsh to find yourself without funds for a specific category suddenly, but it’s an eye-opening way to budget successfully.

If you overspend, it’s an indication that you need to go back through your expenses and figure out where you stand.

Do you need to add more money to that account and put less in another, or do you need to revamp your spending?

Oftentimes, people find out that they shop too much, have a coffee habit, or spend too much on lifestyle habits, such as smoking or drinking, by using this method.

Does Cash Envelope System Limit Overspending More than Digital Envelop System

Some people do tend to spend less when they have only cash to spend. When the cash is gone, it’s gone.

It’s much easier to swipe plastic and overspend than it is to spend cash that you don’t have. When the money runs out, you either have to dig into another cash envelope or not spend; it’s that simple.

With a debit card, you can easily overspend, which may cause you to have a negative balance in your account. This has its own negative effects as then you are on the hook for bank fees for over-drafting your account.

Wrap up to Digital Envelope Budget System

Use a digital budget system to your advantage. Deposit all of your available funds into a secure virtual envelope or assigned bank account. You can also make categories for easier monitoring. The categories could be as simple as bills and fun or as detailed as groceries and entertainment. You can assign a percentage to each category.

If you are a digital person that can stay within a defined budget and can check the budgeting app on a regular basis, it may work well for you.

If you prefer to see the cash in hand and know beyond a doubt whether you have money left in each category or not, the traditional cash envelope system may be better for you.

I hope to see you come back to my awesome blog and join the Investadisor Tribe. My goal is to help millions of people to be financially better off.