Using A Separate Checking Account as A Cash Envelope

Written by
Damian Dunn

On a recent episode of the podcast, Pete and I discussed alternatives to the “cash envelope” method of budgeting. If you’re not familiar with the ol’ cash envelope system, I’ll explain. First, you’ll get a few envelopes and write different budgeting categories on the outside of them. Food, clothing, utilities, etc. Next, you’ll fill those envelopes with the amount of cash you’ve budgeted for them for the entire month. As you need to make purchases in those categories you’ll use money you’ve put in the corresponding envelope. Once the envelope is empty, your spending is done for the month in that category. Pretty simple, right?

A listener wrote to us saying their family has tried this approach, but didn’t like hauling cash around in an increasingly cashless society. What suggestion could we give them?

One of the solutions we came up with was to use a dedicated checking account as a quasi envelope system. Sure, it’s not as black and white as envelopes since all of the money is commingled, but you can keep a lid on spending if you use this method correctly. Here’s how it works…

You’re going to open a new checking account, probably at the same bank your main checking account is at. This new account will be used for daily purchases. Things like food, clothing, gas for your car, entertainment… Remember entertainment? Those were the days. Anyway, stuff you spend money on when you’re out and about just doing life is what we’re going for. Your rent/mortgage can be paid from your “old” account as can utilities, insurance, car payments, student loan payments, planned savings, and so forth. If it’s a relatively fixed expense, the old account can, and should, handle it.

Now that we know the responsibilities of each account, you’ll need to do a smidge of math. First, add up all of your “fixed” expenses as roughly described above. This is the amount of money you need to keep in the old account (and preferably have them paid automatically, but that’s another post).

The math continues...

Next, subtract the total fixed expenses from your monthly household income. The difference is the amount of the transfer to your new checking account.

Once the money is in your new account, you’ll still want to keep track of spending overall because when the money is out, you’re done for the month. You could do this through an app your bank provides, a budgeting app linked to your bank account, or even keep a running total of money spent in a spreadsheet shared on the phones of everyone who has access to the money. Whatever works for you is ok.

Consider paying special attention to categories that give you trouble when it comes to controlled spending. If you really struggle with how much you spend on food (dining out and groceries combined in this example) but don’t have issues with many other categories, you could consider modifying this method and using the new checking account only for groceries and dining out. Pay everything else from the old account and swipe the new debit card for food. You’ve given yourself a limit to spend and once is eaten up, it’s gone.

This approach can be very flexible to fit your specific application, but it will provide you with guardrails to keep your spending in check. Will some people still benefit from using cash exclusively? Probably. If you’re looking to make a hard reset on your spending and need to force yourself to think about every purchase made, using cash is a great way to do that. Be honest with yourself. If this is you, it’s ok. Make the change for a time, get new behaviors established, and then decide if moving to the method described above makes sense.

Budgeting is incredibly personal. What works for you may not work for your neighbor. The key is experimenting to discover the correct approach. Once you figure out what works for you, you’ll have a big advantage as you continue to work on your financial life.

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