Managing Cash Flow Using The Digital Envelope Budget System | PlanEasy (2024)

Whether it’s a torrent or a trickle, having a system to manage cash flow can help make money easy. One of the most time-consuming things about personal finances is managing income and spending. But what if you had a budgeting system that helped you manage that monthly cash flow? And what if that system was free, easy to set up, and simple to maintain?

Managing income and spending is the best way to achieve financial freedom. It doesn’t take much to go from financial ruin to financial success. It can be as little as $10 per day. It’s not about stellar investment returns, or risky real estate investing, or earning six figure salary, it’s all about paying attention to income and spending.

But old methods of managing cash flow need to be updated for the digital age. Cash is less prevalent, and credit and debit transactions dominate. Any system for managing income and spending needs to be digital, automated, and easy to set up and maintain.

The envelope budget is a classic way to manage income and spending. It’s a proven way to manage cash flow and it’s easy to understand. Money gets allocated to certain envelopes and spent during the month. As money in an envelope gets low this provides a signal to slow down on spending until the envelope gets replenished on the next payday.

Thanks to no-fee online bank accounts, the envelope budget can be easily adapted to the digital age.

But it’s not as simple as just creating a few new bank accounts. To manage cash flow with the digital envelope budget system it helps if you have a budget already created. This may require tracking your spending for a few weeks or months. Or it may require looking at past statements. It also requires an online no-fee bank account.

This is how you set up the digital envelope budget system.

To create a system to help manage income and spending it helps if you have a budget already created. Without knowing where your money is currently going it can be tough to create a system that really works. To use the digital envelope budget system you need to know how much money to put in each envelope. This starts with a rough budget.

Creating a budget may require tracking your spending for a few weeks or months. Or perhaps looking at past credit card and bank statements. By looking at actual purchases the budget will be more realistic and easier to manage. The best budgets are based on reality.

Once you have your actual spending/budget you can move onto the next step.

In the past, the envelope method would consist of multiple envelopes with cash in them. Each envelope would have cash that was allocated for a specific purpose, food/groceries, restaurants, clothing, rent, utilities, savings etc.

Each envelope would get replenished with new cash on payday and would have cash removed as purchases were made.

Money goes in, money comes out. When there’s no money left in an envelope, or money is getting low, then it’s time to slow down on spending until the next payday.

To do this digitally we need a few ‘virtual’ envelopes. Luckily, no-fee online bank accounts are perfect for this. We personally use Simplii and Tangerine for this. Money comes in on payday and then gets allocated to our various accounts.

For couples you may also have a joint account set up for shared household expenses like rent, mortgage, utilities etc. We’ve had a joint account set up since before we were married. Some of our regular income gets funneled into the joint account to cover shared household spending.

We particularly like Tangerine for our digital envelopes because you can set up multiple savings accounts and name them individually. Between Sue and I we have over a dozen accounts to help manage our personal spending. This seems like a lot but they’re all summarized nicely in each app.

It’s best to sketch out your “flow” on paper before setting up the individual accounts and automated transfers.

Start with money coming in, this is typically net income from an employer. How much is it? How often do you get paid? Is it weekly, bi-weekly, semi-monthly, monthly etc. For parents or lower income earners, income may also need to include income from government benefits like the Canada Child Benefit.

Next is money coming out. What are the envelopes you want to use? What are they for? The best envelopes won’t be too specific. For example, you may lump all personal spending into one envelope. This reflects the reality that specific spending categories may be higher or lower than budget in a given month. For example, you may spend more on clothing and less on restaurants one month. As long at the total is on track that’s the main goal.

We personally use the following envelopes. Personal spending x 2, household spending, household savings (infrequent expenses like home repairs, vehicle upgrades, vehicle repairs etc), and emergency fund. We also put money into investments each month, both for RESP and retirement.

Here’s what our flow looks like (the numbers are made up). We even use additional envelopes in our personal accounts that I’ve left out of this flow. For example, we plan ‘gift’ money on a monthly basis, so I have a personal savings account that holds the excess, this gets drawn down as I purchase gifts and slowly replenished each month.

Managing Cash Flow Using The Digital Envelope Budget System | PlanEasy (2024)


How to use cash envelope budget system? ›

The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes. Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes.

What is the digital envelope system for budgeting? ›

With this method, you withdraw the total amount of money allocated for essential and non-essential spending in a given timeframe (typically a pay period or an entire month). Then you put the amount of cash allocated to each of your spending categories into an envelope labeled for that purpose.

How can you use the envelope method of budgeting to monitor cash flows? ›

Each envelope represents a budget category, such as groceries, entertainment or eating out. Start the month by putting the amount of cash you've budgeted for each category in a separate envelope. Once an envelope is empty, you can't spend in that category until next month.

What is one potential downside of using a cash envelope budget? ›

You may also feel unsafe carrying cash, as it's harder to track it when it's lost or stolen. It can be cumbersome to get started: Getting all the envelopes ready and allocating money into categories can take some time to set it all up, especially if you haven't created a budget before.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is the envelope budget trick? ›

To begin, a good rule to follow is the 50/30/20 method: 50% of funds go to needs, 30% wants and 20% to financial goals. Make an envelope for each category that applies: rent, utilities, phone bill, gas, groceries, emergency, savings and leisure. Put aside cash in each envelope corresponding to the amount used.

How do you budget and manage cash flows? ›

How cash flow budgeting works
  1. Step #1: Determine your time frame. ...
  2. Step #2: Identify your projected cash flow. ...
  3. Step #3: Input your current net cash flow. ...
  4. Step #4: Analyze your cash inflow vs. ...
  5. Step #5: Calculate the ending cash balance.

What app uses the envelope system? ›

RealBudget is designed to bring you the simplest form of money management in the most straightforward way possible. Create monthly budget envelopes, enter transactions, and track how you spend your money each month.

Is there an electronic version of the envelope system? ›

The digital envelope budgeting system helps users track their finances like never before. If you want to cut down on splurges, identify unnecessary expenses or simply get a better idea of how much you're spending, you can benefit from creating your own system.

Is a cash envelope system worth it? ›

The envelope system is based on the whole psychology of people spending less when using cash instead of plastic. You are far more restrained in your spending when you pull money (not plastic) out of your wallet. That's one of the biggest benefits to stuffing cash into envelopes for budgeting purposes.

What is Dave Ramsey's envelope system? ›

The envelope budgeting method is a budgeting system that was popularized by personal finance author Dave Ramsey. The method involves dividing your take-home pay into spending categories (e.g., rent, utilities, et cetera), labeling an envelope for each category, and putting the cash you plan to spend into the envelopes.

What should not be included in cash budget? ›

There are some non-cash expenses that are not contained in cash budgets because they do not entail a cash outlay, for example, bad debts and depreciation. The cash outflow section in cash budgets contain: Planned cash expenditures. Fixed asset purchases.

What are the rules for cash stuffing? ›

Cash stuffing involves putting money in envelopes earmarked for various spending categories — like rent, groceries, entertainment and gas. Once you use up all the money in a given envelope, you aren't allowed to spend any more in that category until the following month.

How does the envelope challenge work? ›

It works like this: Gather 100 envelopes and number them from 1 to 100. Each day, fill up one envelope with the amount of cash corresponding to the number on the envelope. You can fill up the envelopes in order or pick them at random. After you've filled up all the envelopes, you'll have a total savings of $5,050.

How does a cash budget work? ›

How do cash budgets work? Businesses create cash budgets and monitor cash flows by making sales and production forecasts. They also analyze past performance and use predictions about future spending and accounts receivable collections to create a clear cash budget.

Is cash stuffing a good idea? ›

Cash stuffing might also be useful for those who want to reduce their credit card spending. By having some or all of your spending money in cash, you're less likely to make credit card purchases, delay paying them off and add to your credit card bill.

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