How to Modernize the Envelope Budget System and Pay Down Debt

With fewer people using cash today, it’s time to upgrade the envelope budget to suit your modern spending habits.

Traditionally, the envelope method involves stuffing paper envelopes with the cash you need to make ends meet every month. Each envelope gets an expense and a spending limit, like this:

Groceries — $350

Toiletries — $45

Once you’ve labeled them all, you only fill these envelopes with enough cash to meet these limits. Then, you go about your month using the money in each envelope. Once you run out, you can’t spend any more in each category until the month resets. Only then can you refill your envelopes.

It’s an effective way to control your spending, but you see the problem, right? Its success hinges on using cash for everyday purchases, which can be hard when you never have cash in your wallet.

So, how can you translate a cash-based budget to your digital spending style? This article is here to help!

How to Make the Envelope Budget Go Cashless

Here’s a simple guide to modernizing this old-fashioned budgeting method.

Figure out Your Spending Limits

To make this kind of budget work without paper money, you’ll have to set limits for your spending. Sit down with your finances to determine how you can cap spending in each category.

Pay the Essentials First

At the start of the month, you’ll pay all your essentials as you would normally — whether that’s by sending a check or transferring money via e-banking. These expenses typically include things like utilities and rent payments — basically anything you can’t get out of paying without consequence.

This rule means you should also pay into savings, cover your credit card bills, and hit any due dates on cash advances first. Although there are many potential benefits of getting a cash advance when you’re in a crunch, the whole point of learning this budget is to get out of debt and boost your savings.

You’ll want to prioritize your savings and cash advance payments before launching into the next step of the budget.

Track Your Variable Expenses

The envelope system is all about keeping track of your money, so you don’t go over the limits you set with your budget. This rule applies whether or not you use cash. If you want to use digital payments, you’ll still have to track these expenses.

Here, you have a choice of writing them out by hand or using an app.

If you go the old-fashioned route, consider getting a notebook that you can divide into categories and assign them your spending limits — just like your envelopes. Keep this notebook with you wherever you go, so you can write down every expense as you make them. Once your tally reaches the limit you set, it’s a sign to stop spending.

If this sounds like a lot of work for you, you can rely on an app like Mvelopes to track spending for you. It syncs all your digital payment systems into one place and tallies your expenses. But full disclosure, the most basic package costs roughly $60 a year.

What’s the Big Difference?

Take away paper bills, and there isn’t much of a difference between these two techniques.

With the traditional cash-in-envelope method, it’s all about subtraction. You track your spending by taking money out of each envelope, and you’ll see your cash disappear until you have nothing left.

A cashless version does the opposite. You’ll have to rely on addition. You’ll tally expenses as you go until you reach your limit, at which point you can’t spend more in that category.

Why Using Cash Doesn’t Work for Some People

While some people might not think twice about using cash — you might if you already use it for the majority of your spending — others may have a tough time making the switch. Here are some of the reasons why the envelope system needs an upgrade.

You Live Far Away from the Bank

Not everyone is privileged to live within walking distance of their home branch. Taking out money from the bank becomes a chore if you need to need to drive far or take public transit to get there.

You Don’t Want to Get Dinged by ATM Fees

Think you’ll get around the bank by going to the nearest ATM? Just remember that some of the biggest branches charge you nearly $2 for the privilege. That surcharge jumps to nearly $5 if you use an out-of-network ATM.

You Buy Things Online

If you shop for the essentials (and some fun splurges) from home, there’s no way an online retailer will accept a cash payment. You have to use your credit card or digital payments to shop online, reserve a hotel room, buy plane tickets, or rent a car. Even some utility providers and online direct lenders require digital payments nowadays.

You Have Amazing Credit Card Perks

Using cash might not make sense if you earn cashback and other rewards with your credit cards. As long as you use these cards responsibly, you can take advantage of these perks to save money.

Bottom Line

It’s easy to believe the envelope budget method can be an effective way to control your spending if you pay most of your expenses in cash. But you don’t have to turn your back on this budgeting system if you rely on debit and credit cards.

You can stick with your modern spending habits and cash in on all the benefits of the envelope budget as long as you follow the advice above.

Modernizing this system won’t take any extra time or effort on your part. In fact, it might save you some time now that you don’t have to withdraw money from the bank each month.