Cash Envelopes Vs. Digital Envelopes

In last week’s post, A Beginner’s Guide to Using Cash Envelopes, I described the many budget-friendly benefits to paying in cash.  It’s a powerful discipline that I believe everyone should try. If you simply detest cash, however, digital envelopes are an option.

Photo Credit: 401(K) 2013 via Compfight cc

When we use cash, we divide several of our monthly expenses, like groceries, entertainment, gifts, restaurants, etc., into cash envelopes with set amounts.  The idea is that once the money runs out, we must stop spending.

For example:  If we spend all our restaurant cash in the first three weeks of the month, then we need to eat at home that last week.

After doing the cash envelope thing for a while, we discovered it was too tempting to rob cash from one envelope to cover expenses in another (i.e. splurging on Chinese takeout with clothing money.  No money for socks = no bueno.).

That’s why we started using digital envelopes.

What are digital envelopes?

We opened several checking accounts at our bank to act as envelopes.  They have no debit cards or checks attached.  There is no minimum balance requirement with these checking accounts, and each one gets a nickname (i.e. clothing, baby, non-monthly expenses like auto insurance, auto repairs, tags, Christmas, and vacation).

For example: Once a month, we transfer $50 into our “Baby” account.  This pays for diapers and whatever food we don’t make at home.  When we need baby stuff, we buy it with a debit card.  Then we transfer money from our “Baby” account back into our primary checking to replenish the expense.

Turns out we aren’t the only ones doing this.  Talaat & Tai over at His & Her Money wrote about why they have 13 bank accounts.  It’s a good read if this concept intrigues you!

Recommended Reading: “Why We Have 13 Bank Accounts” by His & Her Money

Should I pay cash for fuel?

We tried that at first, but we use our debit cards now.  We don’t want to leave the children alone in the car when we go inside to pay.  Plus, winters in the Midwest make pumping fuel just…awful.  Since fuel isn’t an impulse purchase we needed to tighten up like food or entertainment, we just leave the budgeted amount in our primary checking.

Which is better:  Cash envelopes or digital envelopes?

Trick question.  I think you should try BOTH!  Budgeting is all about challenging yourself to find ways of living within your means.  These are great ways to do that.  Cash typically causes people to spend less, so it’s a great way to challenge your impulse purchases.  However, digital envelopes are safe and simple tools for storing your budgeted money without tempting you to spend it somewhere else.

You don’t have to use your envelopes the way we’ve used ours.  The idea is to find the problem areas in your budget.  We have two children under three, so they’re burning through diapers like it’s their job.  A “Baby” account makes sense for us right now.

Action Step:

Find one spending category and create a digital envelope system for it.  Open a basic checking or savings account, nickname it, and make your first deposit.  Don’t touch it until you’ve spent money in that category.  Give it a shot and tell me what you think!

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To see a video walk through of my cash envelope system, click here.

Join the Discussion: Have you ever tried the cash envelope or digital envelope systems?