Envelope budgeting remains a popular way to manage money. The method divides physical cash between paper envelopes for different spending categories. We then take out the money to pay for things as the budgeting period goes by. However, the digital envelope system might be the answer if you are not up for using cash.
The challenge for the envelope budget method is that the world is moving away from cash, and some places only accept cards; thus, using money might prove difficult, if not impossible, to pay for things like utility bills. As a result, some of us prefer to do everything digitally.
The digital envelope system replaces the need for carrying cash by moving the whole envelope budgeting process online. Being one of the more simple but effective budgeting approaches, this can be a great way to get your finances on track and reach your financial goals faster!
What Is The Digital Cash Envelope System?
The digital envelope system has you categorize every cent of your income into a spending category. This acts as an excellent tool for sticking to your budget, which also might involve putting an end to overspending on individual categories of your outgoings.
With this budgeting method, every time you receive your income, you allocate all of it between different spending buckets. As your budgeting period passes, you withdraw money from those buckets and spend it per your needs. Once the category is empty, you cannot spend any more money until the next budgeting period.
Budgeting your money in this way will help you stop overspending and can help you to save money as you can allocate a proportion of your income to a savings pot. Digital cash envelopes also mean you do not have to create a potential safety risk as carrying cash might be dangerous and allow payment accessibility as some places do not accept cash.
Who Is The Digital Envelope Method Ideal For?
This method is a great way to control your expenses since it forces you to stick with your plan and stop overspending. Once the envelope becomes empty, you cannot spend any more within that category.
The digital envelope method will require some understanding of smartphone usability and access to the internet. It's ideal for those who want to get organized with their finances but also want the convenience of not having to use cash and feel safer by not carrying it around.
The digital cash envelope system is excellent for you if you:
- Want to stick with your budget limits for each category
- Like to pay everything cashless
- Desire to cut unnecessary expenses
- Prefer to use a digital envelope system app over cash envelopes
How To Budget Your Money With The Digital Envelope System?
The digital envelope system allows you to create spending categories, to which you divide your income every pay period. Everything is done digitally, however, either through a budgeting app or by creating subaccounts within your normal bank account.
When considering any budgeting method, including the envelope system, it is essential to note that no two personal budgets are identical. Specific categories and amounts in them might differ due to unique events like income amount, family commitments, or debt repayments.
To succeed with budgeting, we must set a realistic budget to which we are ready to commit and stick. If we start to be too severe with ourselves, we might become demotivated and give up on the idea.
Create Categories For Your Spending
The number of personal budget categories you choose to set up and what they are will be an individual choice. You want to find the right amount that will work for you, not make up the process too long.
Aiming for somewhere between 5-9 digital envelopes is reasonable. However, a digital envelope budget system for beginners might include fewer categories to start without getting overwhelmed.
My envelope system had seven categories: groceries, transportation, eating out, shopping, personal items, going out, and miscellaneous.
Set Limits For Each Category
Once the categories are in place, you should set the amounts you desire to spend on each category. An excellent place to start this will be with your previous monthly expenses. Having this information will allow you for more realistic premises.
Next, you will need to set your limits based on what you can pay within a budgeting period. This duration can vary if you are self-employed with irregular income patterns or if you are employed on the frequency of your salary.
When considering setting those limits, remember that our needs (expenses you can't leave without) and wants (non-essential expenses you have fun consuming) are different. Therefore, when setting the limits in digital envelope system categories, you must base it on what you can afford rather than what you want to spend on a specific category.
It's crucial to secure your realistic limits, and you are ready to commit to them. If you cannot stick to those limitations, you might need to adjust them by adding or subtracting from different envelopes until you get comfortable with them.
Fill Your Digital Envelopes With Money
Once you select categories and the limits to each of them, using the digital cash envelope system is straightforward. Once the new spending cycle starts, which usually overlaps with you receiving your income, you can fill your digital envelopes with cash.
When the money is in the envelope, you will utilize these within the spending categories in the spending cycle. Once the envelope is empty, you won't be able to spend any more in the given category. If you have cash left over, you can roll them to the next month within the exact category or put them towards savings or debt repayments.
Where To Set Up A Digital Envelope System?
I recommend two applications for setting up your digital envelope system. One is a budget app named Goodbudget that visually replaces the envelope budget system, budget planner, or worksheets and allows you to do all planning virtually. It is usually separate from your bank account, but some can be connected to track spending.
The other choice is a money management app, like Qube Money, in which you deposit money into and organize the envelopes, known as Qube inside the app. Then, you fund your envelopes, (or “qubes”), to fund your spending as you go through the cycle. Again, this is more of a subaccounts approach but reimagined for the digital envelope system approach.
Goodbudget is an app available on the Web, Android, and iPhone. It uses the envelope budget method to create different categories of envelopes of your choice in which you allocate your spending. Then, as your budgeting cycle passes by, you input your spending in the app, which tells you how much money you have left.
You have an option of a free plan or a paid-for plus plan which is $8 a month or $70 a year.
The Free Plan
With the free plan, you get the following:
- 20 envelopes
- 1 account
- 2 devices
- 1 year of transaction tracking
- Community support
The Paid Version
For paid for version, you get the following:
- Unlimited envelopes
- Unlimited accounts
- 5 devices
- 7 years of transaction tracking
- Email support
The Gooodbudget app allows for a digital envelope system which is a great way to get started with budgeting and become in control of your finances. In addition, the functionality of community support is an important one, with personal finance not being an easy topic for many of us.
The simple and easy-to-use app allows every user to get started quickly, and the app functionality provides for things like helping you to get out of debt or aim for a long-term financial goal, split with monthly milestones.
- The free version allows for a good amount of resources and up to 20 envelopes
- In-app resources to help with the budgeting journey
- Easy to sign up and get started
- Nicely laid out reports and analysis of your spending
- The free version does not limit the use of the app; it just provides fewer capabilities
- Ability to access the app, even in the free version, from multiple accounts – which is great for couples and families budgeting
- One financial account restriction
- Entering transactions into the app might take some time
- There is no resource or tools for investing
What I Like About Goodbudget
The Goodbudget app does exactly what it says it will do – it helps you budget using a digital envelope system. When I spent some time in it, it was all done in the free version of the app, and I didn't feel I was restricted in any way.
The ability to add a debt account and savings goal are both great features. I find them essential when thinking of your long-term financial goals, as you can then be reminded of what it is that you are working towards.
The app's layout is simple, and its capabilities of working both on the phone and the app made it easy for me to review my spending for the previous cycle.
Qube Money is a digital envelope system bank that issues you with a Qube Money debit card in partnership with Choice Financial Group, linked to the app. The way it works is that in-app features allow you to create envelopes called qubes, which, just like in the digital envelope system, divide your money into different categories of your choice.
Then, whenever you want to spend any money from that qube, you need to open the app and transfer money from that qube into your main account so that funds are available to spend.
After using the card like any other bank card, the unused funds from the qube you have transferred into the main account will be returned to the qube. This keeps your main account balance at zero, preventing overspending and acting as a security feature.
The app has three options. You can go for a basic free one, a premium option which is $8 a month, or a family option which is $15 a month. If billed yearly, you can save 18% on the subscription.
The Free Plan
With a basic plan, you get the following:
- Personal account
- Theft protection in the way of default zero bank account balance
- Peer-to-peer transactions
- 10 categories
- Apple and Google Pay enabled
- Two days early payday
- The virtual debit card number of bill qubes
- Subscription controls
The Premium Plan
With a premium plan, you get the following:
- Everything from the basic plan
- Reports and analysis of spending trends
- Unlimited amount of qubes
- Virtual account number for bill qubes
- Joint account option for sharing with your partner and in-app notifications
The Family Plan
With a family plan, you get the following:
- Everything from basic and premium plans
- Parental control
- Five accounts for kids, teens, and adults
Qube Money goes one step further with a digital cash envelope system and allows for an overhaul of your finances in one place. With both premium and family features, it's a good choice when it comes to household budgeting.
The default zero technology also ensures that no unauthorized transactions take place on your account, making this a really secure option. Being insured by a reputable bank also adds to peace of mind and ensures a level of plain field when comparing them and a normal bank account.
- A proactive approach to spending money by planning ahead
- With the app functionality and in-app money management, it can stop you from overspending
- Security standards are high
- The premium feature allows for finance management for couples with joint payment authorization options
- The family feature is a great way to teach kids about money while managing the budget for your whole family
- Using your money will require you to be connected to the internet each time
- The app is based on a debit card rather than a credit card; thus, we cannot earn any potential rewards
- The app doesn't show a view of all of your financial situation, like savings and investment account, but only what happened in the app
What I Like About Qubes
The ability to transfer my money into another app that restricts me was a good way to stop overspending. Moving the money from the qube to the main account to spend it made me think twice about my purchases.
With the free version as an individual, I felt no restrictions on app usability. The ability to connect it with my Apple pay was great for someone like me who doesn't like to carry my wallet around. The app layout is also user-friendly and easy to use.
How To Set Up The Digital Envelope Budget System?
If you decide you want to move forward with the digital envelope budget system, here's how you can set one up.
1 – Calculate Your After-tax Income
Firstly, you will need to figure out how much income you will have to work with. This will be after-tax and any other deductions from your salary that are made before you receive it. It includes income tax, student loans, health insurance, and pension contributions.
Some people may have variable or not secured income streams, such as freelancers, self-employed or business owners; thus, income might need to be estimated. In addition, fluctuations in monthly salary will have to be considered when planning for a longer term. Some people get paid weekly and some biweekly, so you must adjust your budget according to your situation.
A tool I find helpful is the IRS website, which is free and helps you determine how much income you can expect to receive and how much taxes you will pay. It might be worth reaching out to a tax professional for further advice.
2 – Set Up Your Financial Goals
A financial goal will give you a purpose for keeping going, ensuring you are motivated and looking with a long-term perspective. Without it, you might doubt yourself and ask – why am I even doing this? An answer to this question will then serve as a good reminder whenever you have doubts and want to give up.
You should have short, medium, and long-term financial goals. This will ensure you stay on track within the current month but also what you are working for in the long term. Financial goals can include purchasing a house, saving for holidays, or paying down all your debt.
For the goals to be realistic, it is the sole reason for budgeting exercise to start with assessing your current situation. If you were to begin with goal setting, you would do so without knowledge of your inflows and outflows at the time.
3 – Choose A Digital Envelope Budget App
The budgeting app you choose for your digital envelope system will largely depend on how you want it to engage with it; and whether you want it to be the center of your financial decisions or play a supportive role outside your banking facilities.
One choice is to opt for an app like Goodbudget, which provides a digital envelope system layout and tracking abilities of the information you input into it. This allows you to keep up with your budget, but it is a separate app from your banking facilities.
The other choice would be to opt for an app like Qube Money which will play a central role in your digital envelope system budgeting by acting as a money management app.
Whichever choice you do opt for, remember that it should help you in your budgeting journey rather than hinder you in it. Thus, I recommend choosing something you are most comfortable with and making sure you invest time in getting to know all of its functionalities and features.
4 – Set Categories For Each Envelope & Transfer The Cash
The way you will set up your categories and amount of envelopes you will need will depend on your personal circumstances. Try to aim for 5-9 envelopes.
These are the steps to follow:
- Subtract all your fixed expenses and direct debit payments from your income.
- Make a list of all the categories where you spend your money.
- Use the rest of your income to set limits for each category.
- Transfer the money inside each envelope category.
- When the digital envelope is empty, you can't spend any more money on that category till you get paid and set your budget again.
5 – Evaluate And Adjust Your Spending
Constant and honest reviews of the progress you have made are very important. I like to do so weekly to see how I am doing with my spending commitments, but it can also be done at the end of the cycle. More frequent reviews are essential for those just starting with budgeting.
Adjusting the digital envelope system is a good sign of self-awareness, and it is expected as part of any budgeting process, with usually more frequent adjustments at the start. You won't get it right the first time you try as you learn to budget, but it is a good first step toward success.
If you see that you are running out of money from a particular category but are left with a spare in another, then certain adjustments might need to be made. You might find hidden spending habits you weren't aware of before you started to budget.
Any adjustments that are made must be realistic, and you must be willing to stick to them going forward. There is no point in making adjustments that you will have to re-adjust next month, as this will only demotivate you. It is also critical to keep your financial goals in mind when doing so.
Envelope Budget System Example
I love to give examples for budgeters better understand how to use a specific budgeting method. For example, imagine that you have $2,500 to spend monthly after tax. I have used the GoodBudget app to set up my monthly budget.
As you can see above, on the GoodBudget app, you can set up as many categories/envelopes as you want, set up limits, and transfer cash.
You can also check which categories you spend the most of your money on and where exactly you spend money on each envelope.
Is The Digital Envelope Budget Good For You?
The digital envelope system is based on the idea of cash envelope budgeting but upgraded to adjust to today's digital world. It is an excellent method for most people, especially those who are just getting started with budgeting.
I have found the digital envelope system working very well for me. I didn't have to carry cash around with me with a risk of losing it, and with an app, I could track my spending at any time. This helped me stop overspending, especially when deciding whether to order a takeaway at work or go home and eat the food I had bought.
When starting with any budgeting method, your journey at the start might take a bit of time and will probably require a few adjustments. Remember to never give up in the tough times and look at your long-term goals for motivation to keep going. A digital envelope system might be just the way to your financial control and freedom.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.