You may have heard of the consumer finance expert who extols the use of the envelope system for savings.
You may not be aware that people can also utilize certain prepaid debit cards to deploy the envelope system.
The envelope system uses cash and paper envelopes. It's as simple as that. It works because it forces people to prepay their expenses.
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.
In my opinion, the idea of designating funds is great. It puts a budget on overdrive. 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 best alternative is to capture the power of prepaid and then apply it to the wisdom of envelopes.
In prepaid debit card-speak, the term envelope can be rephrased to “sub-account.”
Some card accounts offer the ability to set aside funds sub-accounts. For example, the Akimbo Card enables a cardholder to create up to five additional sub-accounts.
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.
All funds in sub-accounts are still FDIC-insured.
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.
How does it work?
The first step – open a safe debit card account with sub-account capacity.
Establish an envelope account with each sub-account card.
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.
Third step – Open those sub-accounts.
Once you have activated your card, you can load funds and start spending. You can also begin to establish your sub-accounts.
You should determine how many envelopes you need.
Here’s one way to organize:
First, deposit funds to your main account.
Second, set up sub-accounts for rent, for necessities you pay online (utilities, insurance, and the rest), another for discretionary (fun) spending, and then one more for “rainy day” savings.
Plan to redistribute money from your main account to each of those envelopes. You will use your main account to hold all of the funds you need for in-person purchases of necessities. The primary account is going to be your go-to card for gas, for groceries, and for all of your have-to spends.
Leave the other cards at home. You will arrange to send your rent by an electronic means (Venmo, ACH, or some other method).
As I mentioned, you will also use the online card for necessities. It might not be necessary to have an online necessities card and a point-of-sale necessities card, but doing so will give you more control over spending.
Because all of these cards are at the same bank, you can move money between the accounts immediately. With Akimbo, it’s called a card-to-card transfer. With some other banks, it's merely something that can take place within the app in the “transfer money” section.
Here’s to a brighter financial future!
Back to list of blog posts