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.
The Varo Money and the Empower debit VISA cards both give cardholders the option of transferring 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 on savings of more than 2 percent.
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.