(Photo credit: Sarabbit)
I love the old envelope system. In case your mom never taught you about this, you decide how much you’re going to spend for food, housing, clothes, etc. and you put that amount in each marked envelope every time you get paid. When the envelope is empty, you’re out of business. (Actually, my mom never taught me this—her approach was basically to just save everything, and not spend at all until they pried it loose from her fingers.) Unfortunately, just don’t use cash anymore.
Nevertheless, it works. If you are really in debt, I do recommend that you move your spending to cash as much as possible. Freeze those credit cards in a block of ice and don’t use them until they defrost (seriously). Give yourself, your partner, and your kids a specific amount of spending money and when it’s gone, it’s gone. Renew when you get paid.
But since we live in a modern plastic and virtual world, can we create a virtual envelope system? Well, sort of, and it would help many of us to better money management.
First, set up a budget. OK I can hear the groans already. Don’t make this too complicated—savings, required expenses and spending money might be enough. Most people find it easier to do a percentage of income rather than a fixed amount. That way, you know what to do with any “found” money, pay raises, or freelance income.
Next, put the required living expenses (rent, insurance, utilities, etc.) in your checking account. In general, it’s best not to carry your checkbook around with you—you probably pay these expenses at home at your desk and not having the checkbook removes some temptation. If possible, have your paycheck sent directly to this account.
Set up auto-pay and auto-withdrawals. You can either authorize the payees, such as credit card companies, to automatically withdraw from this account, or you can set up payments from the checking account to payees such as utilities. Don’t pay extra for this (some utilities are really dumb on this one).
Groceries are a special case. Certain unnamed hoity-toity supermarkets don’t accept checks anymore. If you do have any budgeting problems, it’s probably better to take out grocery (and restaurant) money in advance and put it in an actual envelope. Or use a cash card like Bluebird (transfer the right amount of cash into it each month). If all else fails and you have trouble monitoring this, designate one credit card for groceries and set up alerts to warn you when you’re getting near your pre-set goal (some allow this and will text you).
Now we get to savings. Again, you can set up auto-pay and auto-withdrawals from most investing institutions. I highly recommend NOT having your savings accounts in the same place as your checking. It’s just too easy to raid it when you need extra. For this reason I like internet based banks, credit unions that are different from where you have checking (so you have to make a special trip), or the big guys like Vanguard where you have minimum requirements.
I particularly love the automated options because it removes opportunities to make bad decisions. We all tend toward inertia. Making a decision every month to save is much more likely to fail than making a decision once, having the savings going forward happen automatically, and just getting used to those withdrawals happening.
Finally, make a list of annual or intermittent expenses (insurance, tuition, property taxes, etc.). Add up what it amounts to annually, then divide it by your pay periods. That’s what you need to put away if you don’t want to be surprised when they show up.
Don’t be afraid to create multiple accounts, say, savings for intermittent expenses, checking for regular household expenses, goal savings for vacation, retirement account, etc. Some internet savings (CapitalOne 360, for example) will allow you to designate “sub-accounts” and name them for specific purposes. You make the deposit and let them know which sub-account it should be designated as.
Mind-games? Sure, but sometimes these little tricks result in big improvements.
