The cash envelope budgeting system is an easy way to portion out your income for the month. But what if you don’t want to carry around cash? Thankfully it’s easy to implement a digital envelope system.
The concept is exactly the same as the cash envelope system but is digital and easier to use and incorporate into today’s digital financial system. So, let's dive into what exactly the digital cash envelope system is, the benefits of using one, and how to set up your very own!
What is a digital cash envelope system?
One of the most effective budgeting systems, the envelope system, has been around for ages. Budgeting is an essential part of your finances and allows you to track your spending and saving efficiently.
In fact, approximately 80% of Americans keep a monthly budget, according to a recent Debt.com survey.
The envelope system is simple. You separate your spending into categories and put a specific amount of cash in each category. For example, if you spend $50 every week on groceries, you would set aside $100 for two weeks or $200 for the month.
It makes you more mindful of how and where you’re spending your money. A digital envelope system is the same as a cash envelope system but is used with a digital system. That can mean using an app or using different accounts or subaccounts at your bank.
You could also leverage your digital envelopes to do a cash envelope challenge to save more money!
Benefits of using a digital envelope system
Using digital cash envelopes helps you stay within your budget without overspending. It also can be implemented without the need to carry around cash, which can be inconvenient, especially if you shop online. Here are a few other ways you can benefit from using digital cash envelopes:
Brings awareness to your spending
Using digital cash envelopes instead of physically carrying around wads of cash allows you to see your spending in real-time, including any online purchases or automated bills.
Using the digital envelope system is also recommended if you struggle with overspending, as you can see how much you spend. If you give yourself $100 a month for entertainment and spend it all going out with friends the first weekend of the month, then that’s all you have for entertainment until next month.
Seeing how much you spend forces you to confront your spending habits and be honest with yourself about what is important- buying a new outfit for spring or putting that money towards buying the new computer you need?
Digital cash envelopes are more secure
It’s also safer, as you aren’t carrying around cash. You don’t have to worry about losing money or worse, getting robbed. If you do lose your card, you can quickly let your bank know and make sure they block your card.
It makes budgeting simple
Another fantastic benefit of the digital envelope system is that it simplifies budgeting. You simply have envelope categories for your expenses, so you know exactly how much you need every month. Plus, it's not a complicated method, so it makes it much easier to stick with.
How to create a digital envelope system
Setting up and using a digital envelope system is similar to using a cash envelope system, but there are some key differences to keep in mind. However, you can easily start using digital cash envelopes with these four steps!
Step 1. Create a budget
First, you’ll need to create a budget. Figure out what your main expenses are. Food, transport, rent or mortgage, healthcare, etc. These are essentially your core expenses that you need to spend every month and usually make up the bulk of most budgets.
Then think about things that aren’t essential but that you like to spend money on every month. For example, eating out, or buying new clothes.
Do some math and figure out how much your expenses are compared to how much income you have every month. How much extra do you have? You can add that extra to your entertainment or fun spending for each month. Make sure to also set some money aside for savings or your retirement fund.
Step 2. Choose categories for your digital cash envelopes
Once you have your budget sorted, it’s time to choose your categories for your digital envelope system. Think about where you spend your money. You can make the categories as simple or complex as you want.
However, it’s generally better not to have too many categories, in order to not get overwhelmed. You can keep it very simple by choosing categories like essentials, debt, entertainment, and others.
Or you can add more descriptive categories, like eating out, rent, groceries, cosmetics, etc. Remember that these categories are not set in stone, so find a system that works for you and feel free to change it up as needed.
Step 3. Create subaccounts at your bank
The best way to use digital cash envelopes without paying for a third-party app is to create a subaccount at your bank. You’ll have to check with your bank to find out if and how it is possible, but many online banks allow you to create subcategories within your main account.
At the beginning of the month, transfer the funds into your subaccounts based on the categories you set up in step two of the digital envelope system.
You can also manually track your spending virtually using a budget worksheet or Excel sheet. This requires more work but it can also be more rewarding. Plus you can stay on top of your spending on a weekly or even daily basis to make sure that you are sticking to your budget.
Step 4. Track your spending
Once you have your subaccounts or spreadsheet set up, you need to track your spending. This is the most important yet difficult part.
Make sure you keep track of your spending on a regular basis to make sure you are in line with your original budget. You can adjust as needed until you get it right.
Don’t be too hard on yourself if you go over in one or two categories at first. By keeping track and being honest about when and how you overspent, you can adjust your numbers the following month until you have a budget and system that works for you.
Budget better with the digital envelope system!
Keeping a digital envelope system is a simple yet effective way of tracking your spending. Similar to the envelope budget, using digital cash envelopes allows you to keep track of your spending in real-time while allowing you to make purchases online.
It’s also safer as you do not need to carry around a lot of cash and risk losing your money. If you decide to use the digital envelope system, make sure to keep track of everything and stick to your budget.