How to Use Debit Cards for Envelope Budgeting

Adam Rust

You may have heard of the consumer finance expert who extols the use of the envelope system for savings.

The envelope system uses cash and paper envelopes. It's as simple as that. It works because it forces people to prepay their expenses. It creates a concrete sense of money. You either have the money or you don't - the envelope system makes that clear as day.

How to Do the Envelope System

The first step is to move money from your bank account to cash. If you receive your wages by direct deposit, then you have to go the teller or the ATM and pull those dollars out.

You take those dollars and put them into envelopes. The envelopes bear the label of a known expense category - for example, rent, or gas, or other necessities. If necessary, a person creates another envelope for paying down debt. After debts are extinguished, a new envelope is established to hold contributions to a savings account.

Envelope savings should give teeth to your budget. Budgetingoccurs ahead of time so that all future debts are prepaid. Only once a person has filled the envelopes do they then have the freedom to spend on discretionary items.

Still, the process is entirely manual. It transforms money from its digital state to paper. In doing so, it takes away the functionality of modern-day electronic payment systems. Cash has to be transported back to the bank to become useful for online shopping. Indeed, unless a person can migrate back to digital, all payments have to be carried by hand. The envelope system requires envelopes and fossil fuel.

The best alternative is to capture the power envelope budgeting and then apply it electronically. You still want to put the money away.

If you use a debit card, then you can set aside funds in different accounts. You do not have to carry the card in your wallet. You should instead set the card aside, perhaps on top of your bureau in your bedroom, and then take out the card when you need it. You will use one card for each of the budget categories inside your digital envelope system. In other words - one card for groceries, one for your housing, another for other household expenses, a third for things you need to buy for children, and a fourth for "fun." 

Last, you need to have another envelope for paying yourself. You need a savings account. You need a high-yield savings account.

The best savings accounts are all online, so again, you will need a bank account to move your money.

Varo Money and AxosEssentials Checking can transfer funds to a high-yield savings account. Individuals can move money to the savings side of their account by requesting a transfer from inside the app. Currently, both cards pay interest at rates that far exceed those offered by national banks.

Envelopes work because a) you prepay b) it instills discipline to budgeting.

Bottom line: the envelope system works, but you can tap its wisdom and still use an electronic account.

Set Aside Money for Safekeeping in these Digital Bank Accounts
Picture of card
Picture of card
Person using the envelope budgeting system

How does it work?

The first step – open a safe debit card account with a high-yield savings.

Think of the account as your home for a specific spending category in your budget.

Note: Regardless of what card account you choose for enveloping, NEVER use a credit card or a debit card with overdraft fees. A budget won’t work if you are paying interest. If you have a card with an overdraft, then the fact that you are dividing your funds up into smaller pieces will increase your risk of overdraft. As long as there is no overdraft capability, the envelope system works.

Second step – Set Up Direct Deposit

Direct deposit is always a great idea. Your money will be available to you the day your money hits your account. There’s no waiting for a check to clear – you are good to go.

You will have to take care of a few procedural steps to set up direct deposit. First, tell your employer or your benefits provider to send your funds by direct deposit. You will need to give them your card’s account number and the bank’s routing number. You should be able to find both in the app associated with the account or through the card’s online portal.

You will want to send separate direct deposits to each of your envelopes. Your employer should be willing to do that as long as you make it easy for the person in payroll. Bring in the right direct deposit forms. See the forms for the Varo Money Bank Account and Axos Essentials Checking at the preceding links. Don't we make this easy for you? 

Third step – open those savings accounts

Once you have activated your card, you can load funds and start spending.

You should determine how many envelopes you need. You will need a card for each category.

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Adam Rust has worked to defend consumers against harmful financial practices since 2005. He has written extensively about overdraft fees, payday lending, credit insurance, student loans, prepaid debit cards, high-cost installment loans, and subprime mortgage lending. The New York Times interviewed him when it reported on the CFPB's rulemaking on prepaid debit cards; subsequently, his research paper framed the debate on consumer protections.

He serves on the Board of the US Faster Payments Council. He is Director of Research at Reinvestment Partners in Durham, North Carolina. He is the author of BankTalk. He is the author of "This is My Home: Challenges and Opportunities of Manufactured Housing" and has testified to Congress on how to redress some of the problems with manufactured housing. See more on his LinkedIn profile.