The 'Envelope System' In a Cashless Society

A few years ago Gary Foreman over at Better Budgeting tried to answer a question on this topic. Unfortunately I don't believe he gave it an worthy answer. I will try to fill in that gap, with what I do. Something I have mentioned before and an idea he never raised, while at the same time looking at his suggestion. First we will look at the question.

Q - My family has been trying to work with a budget for the past several months, but the "envelope" system is just not practical with our primarily cashless lifestyle. How can I track our cashless expenditures for gas, groceries, personal items etc. and still know how much is left in each category as the month goes on?
- Lisa

Like him I agree that Lisa is right. Some of the old budgeting tools don't work so very well in today's society. Especially since more of purchases are made by debit cards or electronic means.
Now lets look at what he told Lisa.

The envelope system worked well when we used cash for all of our purchases. You immediately knew if you could afford a purchase. Moving money from one envelope to another was a warning sign that you could be getting into trouble.

Unfortunately, very few of us use much cash anymore. We're much more likely to pull out a credit/debit card or write a check. And an envelope system doesn't handle credit cards very well.

One way to modify the envelope system is to add an additional envelope for your checking account. When you charge something move cash to the 'checking account' envelope. If you charge $20 worth of groceries, move $82 from the 'grocery' to 'checking account' envelope. Then when the credit card bill comes you'll have the money available to pay the bill.

Or Lisa could use a 'pretend envelope' system. She would set it up just as if she were going to use an envelope system. But she wouldn't actually put cash into the envelopes. Instead on the front of the envelope she'll list how much money is assigned to it. As she writes checks or makes charges, she'd subtract that money from the balance listed on the front of the envelope. When the running balance on the front of the envelope got to zero she'd have to quit spending in that category or 'move' money from another envelope.

Another way would be to use one or more sheets to keep a running balance for each category. She could have one sheet represent each envelope. Or she could have one sheet per month that contained the balances for all of the envelopes. The sheets, or perhaps a small spiral notebook, could be kept in her pocket or purse.

The danger in any virtual envelope plan is that you'll forget to make the entry and your balance will appear bigger than it is. One way to avoid that is to put any receipt into your pocket or purse. When you get home you can deduct the expense from the proper envelope and place the receipt inside.

There are also products that Lisa can buy that will help. One is the Budget Map which offers a specialized check register that allows you to keep track of different budget categories and another is Mvelopes, which features an online approach.
- Better Budgeting

Now let's take another look. Here is what I do when I am doing the virtual envelope system. The idea is a simple one and is very much like a true envelope system. That being to set up separate accounts, making sure the financial institution won't charge you for low amounts in those accounts. Let me explain. I have a separate account for housing. Another for auto, travel, insurance etc. At this time with me just being in the process of rebuilding my savings each account only has like $5 or $10. In time as I build my savings back up each account will have the minimum $1,000 emergency fund. As time goes on, my one year of income that I highly recommend that you save in your emergency fund will be divided between these accounts. Meaning each account will have a reserve of about $5,000 to $6,000 so that each of those funds can continue in the event I were to lose my job or during some other kind of emergency.

I know some balk at this idea. But it truly is the most like the old fashioned envelope system. So once the money is gone, you have to stop spending in that category.

I hope I didn't confuse anyone, and was able to clearly point out my thoughts on this idea. If you have any questions feel free to ask.
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