“The Envelope System” is a financial planning method that’s simple enough to follow and easy enough to adhere to. Take a bunch of envelopes and write the categories that every purchase you make could be placed into. Groceries, gas, school clothes, cable, cell phone, rent, etc. 10, 15, 20 envelopes. Whatever it is, when you get your paycheck you withdraw the cash, and according to the budget you made, place the appropriate amount of cash into each envelope. When you want to spend on a specific category, take your envelope, open it up, and you’ll see how much you have left to spend. You segment all your spending and when the envelope is empty, you know you’ve used up your allotment. Simple.
A step up from this though is my recommendation to use different bank accounts to achieve this system instead of placing physical cash into envelopes. For starters, you should be putting every purchase you can on a points earning credit card. Spending cash earns you no bonus and is throwing away the opportunity to earn rewards. In my case, I have a number of different bank accounts and the bank I use for the majority of my envelope system saving is ING Direct (now overseen by Capitol One 360).
Capitol One 360 allows you to create savings accounts in real time, just with a few clicks of the mouse. In fact I have 18 different bank accounts, one main checking and 17 savings, all related to a different category I’m saving for. I’ve found that segmenting and compartmentalizing out my different goals and expenses allows me to have a much greater handle on my finances.
The theme isn’t too hard to decipher. I name all my bank accounts after Beatles’ songs, with the song name connected to the category. It’s actually a creative exercise, and let’s me merge the mental and financial challenge. “Doctor Robert” for example is savings for things related to my health: Gym membership, doctor bills, health savings account. “A Taste of Honey” is the account I use to save for groceries and eating out. “Drive My Car” is saving for vehicle expenses, insurance and payments. Most of them you can probably get an idea of what I’m saving for. Some are a little tricky.
So what is the benefit of this? 18 bank accounts sounds a bit excessive doesn’t it? But it’s actually much more stable and provides even better clarity. It allows me to have a definitive number of how much I’m able to spend on certain topics. I use the monthly budget I’ve made to schedule automatic transfers each week from my checking out to the different savings accounts. (You can transfer an unlimited amount for free, from checking to savings.) I then look at what’s in the savings account to determine if I can afford something.
Heading out to the grocery store? I know what I can afford to spend by sneaking a quick look at my, “A Taste of Honey” bank account. Curious if I can get the regular oil change this month or go for the higher quality oil? I just check, “Drive My Car.” Thinking about buying some precious metals of gold or silver? “Golden Slumbers” tells me how much I have to spend. Instead of having one big account and using a general spreadsheet or, just trying to remember, (Good luck), I know exactly what I’ve got. Each month that I don’t spend what’s in that savings account, I’ve got a little bit more to devote to a future purchase and still knowing I won’t be going into debt.
It’s a simple process to set up a checking account with Capitol One 360. I’d recommend checking it out and weighing the possibilities of switching banks or having an additional bank. It’s, “the envelope system” on steroids and will do wonders to helping you spend more responsibly and save more for the future.