How the Digital Cash Envelope System Works For Us
BY BRANDON VAGNER, CPA, Ph.D., & WALLET WIT FOUNDER
Most everybody has heard about the Dave Ramsey cash envelope system. Well, I’m going to tell you why the physical cash envelope system did not work for our family and what we did differently that changed everything for us.
I first want to say that I’m a HUGE fan of Dave Ramsey and all his teachings. I listen to him almost daily and think he is doing amazing things. We’re all lucky to have him doing what he’s doing. I especially love the concept of living off of cash that he has brought to so many households. His cash envelope system has helped an incredible number of people climb out of debt, but we had to put a unique spin on it to make it work for our family.
One of the many reasons why Dave advises people to use the cash envelope system is because psychologically there is a major difference between how the brain processes using cash versus a credit card.
When you hand a cashier cash, you do not get that cash back. However, when you hand a cashier a credit card, the cashier hands you that credit card right back after they swipe it. It’s difficult for your brain to process the decrease of cash when using a credit card, because you are not immediately seeing that decrease. You simply get your card back and you’re on your way to the next store.
If you get on a cash envelope system, you’ll definitely see exactly what I mean. You’ll begin to really watch what you spend, because it hurts to see your cash balance literally decrease right before your eyes.
Why We Needed an Alternative to the Cash Envelope System
There is one major issue with the physical cash envelope system (i.e. putting cash in actual envelopes every month). We found it extremely difficult to constantly carry around cash and keep the different piles, if you will, separated as we moved through our days.
Now, maybe Dave talks about a digital alternative in his classes. I don’t know, because I’ve never actually taken his class, but using actual envelopes did not work for my wife and I. That’s not to say it won’t work for you, but I’m going to offer you a slight, but powerful, modification if you’re struggling with it like we did. Again, this is based off of what we found to work for our family.
Not Everywhere Accepts Cash
The cash envelope system, as most people know it, is a very manual process, and you better hope every place takes cash. The inability to pay cash everywhere was another problem we constantly found ourselves running into. Maybe it’s just urban areas, but we had issues because of this.
I don’t know about you, but we order food and everyday essentials from Amazon all the time. The physical cash envelope system doesn’t work well for that, and Dave actually says it’s okay to use a debit card for online purposes.
Let’s pause here for a second. You can think of a debit card like cash. It’s tied to your bank account that contains all of your cash. A debit card is NOT the same thing as a credit card. The use of a credit card increases your outstanding debt, but the use of a debit card directly decreases your available cash.
All I did was bring Dave’s physical cash envelope system into the digital age for everything. Not just online purchases and your occasional hotel or rental car booking. We literally use debit cards for everything, but in a very unique and organized way. I think it’s safe to say my wife and I are not the first to do this, but it was something we had to figure out on our own. So, I’m excited to bring our process to you. Again, this may not be for everybody, but we save at an incredible rate now that we’re using our digital cash envelope system. It’s the only system that has worked for us.
How Our Digital Cash Envelope System Works
Here is how my Regions bank accounts are organized. Don’t worry. I’m going to explain everything in detail, but I want you to have this visual before I get into the details. You’re definitely going to want to read the details below. This has been life changing for us.
How to Manage Your Budget Digitally?
I knew that the physical cash envelopes were not working for us and I needed a digital cash envelope system. I also found out the hard way there was no way I could do this with credit cards. Seriously, don’t try it, because there are key fundamental and psychological aspects of a debit card driven digital envelope system that allow it to work.
At first, I actually attempted managing our spending through credit cards and it was an absolute disaster.
It’s extremely easy to blow past your personal monthly budget when using credit cards, because there is nothing to stop you. Most people have budgets that are significantly lower than their credit card limit, but the credit card system gets the better of people every single month. You have access to spend TONS through that credit card and the majority of people do.
So, I started playing with the idea of developing a digital envelope system within the bounds of my Regions banking account. Specifically, using checking accounts linked to debit cards. Did you know you can open many different individual checking accounts? You sure can and I recommend you do as soon as you get done reading this article.
Why did I use checking accounts for my digital envelope system and how were they different from using credit cards?
First and foremost, the checking account balance tracks down toward $0 every month. Whereas, credit card balances do the opposite. There is something very powerful about watching your account go down toward $0 every month. It’s almost like a survival instinct that kicks in and you do whatever you can to survive on what is left for the month.
Secondly, I have the power to easily automate the “filling of the envelopes” each month. That’s because it’s all on autopilot through my designated direct deposits and automated transfers between accounts. It’s incredibly easy to setup through your bank and you only have to do it once.
My employer allows me to direct deposit my paycheck to up to 3 different checking accounts. If your employer only allows direct deposit to one checking account, don’t worry. It’s super easy to automate account transfers within most online banking dashboards.
How to Figure Out Your Checking Account Categories
I have a very detailed monthly budget setup, but you really don’t need a separate debit card for every line item in your budget. I did a lot of analysis before creating our primary accounts within Regions and tried to make sure I simplified things as much as possible.
I came up three primary checking accounts that all families should have. You’re going to need a General Account, Food Account, and Individual Spending Accounts.
(1) How Does the General Account Work Within the Digital Cash Envelope System?
The purpose of the General Account is to pay out payments such as your home mortgage, rent, electric, water, Netflix, etc. These are your recurring payments primarily related to your housing.
The General Account is also used to pay for family vacation costs. Now, you’ll need to track your family vacation spending in a spreadsheet to make sure you stay within your annual vacation budget, but that is the card you would swipe when on vacation.
Now, I don’t believe in car payments. You should get that car paid off as soon as possible, but if you have a car payment, then it’s going to be paid through this General Account.
RELATED: Why You Shouldn’t Buy a New Car
(2) How Does the Food Account Work Within the Digital Cash Envelope System?
You’re only going to have one Food Account. Each spouse will get a debit card that is linked to this one single Food Account. Keep in mind that this account is meant for all types of food spending. That includes restaurants.
WARNING: If you and your spouse are the types to go out to eat a lot, get ready for an intense learning curve. If one spouse can’t control their eating out habits and spends the majority of your food budget, that doesn’t mean you can just go transfer more money or borrow from the General Account or savings. No, that means you both are going to have to eat very cheaply for the remainder of the month and make what is left in the Food Account work.
Are you beginning to see how this is different from using a credit card? With that credit card, you were not having to worry about sticking to a very specific budgeted amount, but using debit cards forces you to.
(3) How Does the Individual Spending Account Work Within the Digital Cash Envelope System?
I should mention that my wife and I first tried to have one single Spending Account with both our debit cards linked to that same Spending Account. It worked okay at first, but we started seeing flaws with it pretty quickly. So, we adjusted and I’ll get into that here in just a second.
The Individual Spending Account is meant to process all your monthly spending. Things like haircuts, gas, oil changes, movies, sporting event, concert, etc. Literally, everything aside from food and your automated housing payments that are processed through the Food Account and General Account, respectively.
I first went to my detailed monthly budget and calculated what we had budgeted, in total, for items like I just described above. We took that amount and literally split it down the middle. So, half is my wife’s money to do what she wants with and the other half is mine. Again, both of our halves were in one single Spending Account at first.
All you wives out there are going to love me for this one. I should definitely mention that it’s not technically down the middle. My wife had to educate me on how much it costs to buy makeup, hair products, etc. I realize that she doesn’t want to go without those things and I don’t have those same costs. So, my wife gets a little more money than I do every month so that she can cover those costs.
A byproduct of this is that it instantly eliminated so many arguments. As long as my wife managers her money and gets herself through the month, I could care less what she spends her half on. Keep in mind, this account was allocated money after consideration of savings. So, everything sent to this account is meant for spending. My wife could go buy 30 $5 bath bombs and try one every night if she wants. It doesn’t bother me one bit because it doesn’t impact how much I have to spend and I know for 100% certainty that we’re living within our budget.
The same goes for me. I can go play 10 rounds of golf in a month if I want to. As long as I make sure I spend less than my allotted half, my wife could care less. She has her half to do what she wants with and she’s happy.
What Went a Little Wrong and What We Did to Fix It
Where this went a little sideways on us was that we found ourselves constantly having to go back and determine who spent what to date throughout the month and how much of what was left for the month belonged to who? So, we decided to take things one step further and break our Individual Spending Account into two separate checking accounts.
Now my wife has her own Individual Spending Account and I have my own separate Individual Spending Account. We did both technically get mailed debit cards for each Spending Account, but I only carry the one associated with my Spending Account and she only carries the debit card associated with her Spending Account.
This was the critical moment when we really felt like we figured out the best digital money management system that worked for us. All of my wife’s monthly individual spending money is auto deposited into her separate account and mine is auto deposited into my separate account. If you look up top at the screenshot of my regions account you’ll see these accounts labeled as Brandon’s Spending Account and Kori’s Spending Account.
It’s incredibly easy to login to the regions app and monitor how much I have left each month. Because we literally only have so much to spend each month (i.e. what we’re both allocated based on the budget), we’re consistently staying within our budget. It’s been the most amazing thing for us. I wish we had started this back in our early 20’s.
TIP: It was very important for us to have all these accounts within one banking dashboard so we could easily monitor ALL accounts. So, this was all done through just one Regions banking dashboard. My wife did not go open her own checking account linked to a separate banking dashboard. If I recall correctly, we setup all these checking accounts as joint or I was the primary account holder. This was purely so that we could have all accounts within one single banking dashboard.
What If You Want to Purchase an Expensive Item?
Let’s say for example that you want to purchase a new Apple laptop. Not your spouse and you want a new laptop, but rather just you want one. That’s going to run you about $2,000. Most of America would just run out and put that on a credit card, but we’re not going to do that. You would need to save within your Individual Spending Account each month until you save up the $2,000. Most people’s Individual Spending Account is going to be under $500 month. Especially, if your budget is tight or you’re trying to stash away a good amount in savings.
Keep in mind you have to pay for gas and other monthly necessities out of that $500. So, if you live tight, you might be able to save $350 each month. That means it will take you 6 months to save for that laptop.
You really begin to see how expensive things are when you start living this way and just how long it takes to truly afford luxury items.
How Do We Manage the Separate Debit Cards?
The beauty is that we don’t have many debit cards to manage. We both have one debit card for the three accounts I just discussed.
On the back of the debit card on the signature strip, we write either General, Food, or Spending. That way, when you’re out and about, all you have to do is flip the card over and you know what digital envelope (i.e. debit card) you need to use for the purchase you’re about to make. It’s incredibly easy and we don’t have to worry about carrying cash around all the time. I actually hate carrying cash around, and typically never do.
What About Our Other Accounts?
In that top section of my Regions dashboard, you’ll notice two other accounts I haven’t mentioned yet.
The first is the Gateway to Success Account. That is my business account for income earned through my various online businesses. It’s extremely important to have your business revenue and expenses flow through a separate business account. This is where all of my business transactions flow through.
You’ll also notice an account called Real Estate Business Account. When we moved to Nashville TN, my wife couldn’t find a job at first so she decided to try out real estate. All of her business revenue and expenses related to her business flow through that account.
The last two accounts (Overdraft Savings Account and Primary Savings Account) are extremely important. So, don’t forget to set BOTH of them up.
You want a savings account established that you can auto transfer your savings each month to. Recall that the General Account is sent the majority of your monthly paycheck. A portion of your paycheck will automatically go to the two Individual Spending Accounts and then you’ll need to auto transfer from the General Account to your Food Account your monthly food budget amount.
Once you complete your detailed budget, you will know how much of the General Account can be automatically transferred to your Primary Savings Account. This is the account that will accumulate your savings prior to you investing. So, at times, it might get rather large if you’re saving with a specific purpose to pay off your mortgage early or pay cash for a new car. This is why you want to make sure this Primary Savings Account is NOT linked to any other account for overdraft purposes. This is very important.
That said, you’ll need to establish a savings account with a specific purpose of overdraft protection. That is why you’ll see that I have an Overdraft Savings Account setup. This is the account you’ll want to make sure is linked to your General Account, Food Account, and Individual Spending Accounts for purposes of overdraft.
On a side note, one would think that if you accidentally over drafted one of your checking accounts and Regions had to automatically transfer funds from your Overdraft Savings Account, that you would not be charged a fee for this. Considering the fact that it’s all automatic and essentially no different than me transferring from one account to another account within my suite of accounts, which is free by the way. That’s not the case though. These banks love to fee you where they can. So, make sure you don’t accidentally overdraft if you want to avoid a $15 fee.
This actually just happened to us and I plan on calling Regions support to discuss it and hear about their rationale as to why that automatic overdraft transfer of my own money costs $15. Stay tuned.
That is literally the only downside we have have encountered since making this change, but it rarely happens. It’s only happened once to us. We typically never go spend more than what’s left, but we accidentally went over by a $1 this past month.
What if You Have a Medical Bill or Auto Repair
This is a tough one. I’ll tell you what we do and you can decide from there how you’ll handle it.
You really have two options. Situations like these either eat into your savings and you get behind on your goals, OR you reimburse your savings via your Individual Spending Accounts.
My wife and I actually just had a $475 auto repair bill. So, we paid the bill through our General Account, but then split the bill down the middle and we’re both responsible for reimbursing the General Account that amount through our Individual Spending Accounts. We actually ended up having some money left over in our Food Account at the end of the month and were able to use some of that to cover some of the cost, but the big picture is that we’re splitting the cost and not allowing our savings to take the hit.
No matter who the medical or auto bill relates to, we act as a team and split the cost. It was my wife’s car that needed the $475 worth of repairs, but I happily split the cost with her, because I know she would do the same for me.
Final Thoughts on the Digital Cash Envelope System
Adopting this digital cash envelope system has made all the difference in the world for us. It’s automatic and incredibly easy to stick to. We never have to think about allocating money each month and we’re not having to carry cash around and manually manage different cash piles. It’s been the best personal finance move we’ve every made.
Now, for those that are die hard cash envelope fans. I know it works for many people, but for my wife and I, we just could not make it happen and had to put this digital spin on it. If you have struggled with managing a physical cash envelope system, then I HIGHLY suggest you try out this digital envelope system I have laid out for you here within this post.
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Brandon Vagner, Ph.D., CPA