The convenience of credit and debit cards can lure you into spending frenzy that can spiral out of control before you know it.  Have you ever come to the end of the month and asked, “Where did all the money go?”  The convenience of plastic has made it far too easy to make purchases that we might not make if we had to dip into our wallet and make a cash purchase.

Studies have shown that spending increases as the means to pay for an item becomes easier.  In other words credit cards have made buying transactions easier, so we’re more likely to buy stuff without concern, until the bill comes at the end of the month!  Likewise, new ‘pay with a wave’ credit cards will make it easier still and foster even more poor spending habits.

I’m a big believer in the notion that cash is king when it comes to paying for items.  If you don’t have the cash, you can’t afford the item and shouldn’t buy it.  Traditional means of budgeting to help curb spending is the Cash Envelope system.  But there are clearly some disadvantages of that.  There’s also a 21^st century version of the Cash Envelope system called Virtual Envelopes.  We’ll explore how you can implement a Virtual Envelope system using your budgeting worksheets.

Traditional Approach: Cash Envelopes for all your Spend Categories

One past useful money budgeting technique was to set up your saving and bill paying system using cash envelopes.  Basically the cash envelope system consists of keeping separate envelopes for your spending categories and populating them with cash from your income source.  Then when a bill comes due or you need to go shopping for food or an item you need, you simply pay for it with cash from the appropriate envelope.

The big advantage of cash envelopes is that, if you budget properly, you will always have the cash to pay a bill when it comes due.  No more worrying about where the money will come from, be it for mortgage or rent, utilities, car payments, repairs, taxes, discretionary spending, etc.

However, there are many disadvantages of this old technique in keeping all that cash around. It’s cumbersome and simply not safe as you can easily accumulate hundreds or thousands of dollars in your cash envelopes.  Just imagine the heartbreak and financial setback should something happen to all that cash.

Alternative Approach: Use Virtual Envelopes for most of your Spend Categories

In today’s electronic world, there’s a version of the envelope system that can take the old proven approach and revamp it for the 21st century:  Virtual Envelopes. Built on the solid foundation of the Cash Envelope system, Virtual Envelopes works seamlessly with your existing cash envelopes and your budgeting worksheets.  The only difference from Cash Envelopes is that for some budget categories you will now deposit the cash into your bank or credit union and manage those categories online, or “virtually.”  Hence, the term Virtual Envelopes.

When you deposit money from your income source, you simply allocate the appropriate dollar amounts to the budget category accounts, based on your spending plan or budgeting worksheet.  It’s easy to move money around your various spending categories or budget category accounts whenever you need to.  When a bill comes due, you simply transfer money from the budget category account to your checking and then electronically pay the bill.  It’s easy and extremely fast once you set it up through your banking institution.

Virtual Envelopes Advantage #1: It’s Easy to Get Started

To get started, ask your bank if they can set up your Virtual Envelope budget categories as sub-accounts underneath your savings account.  There should be no charge for doing this.  If your bank will not provide this service for free, check around for other financial institutions in your area, including your local credit union.  I’ve done virtual enveloping for about 30 years through a couple different credit unions.  I’ve also had a couple colleagues using this approach.  So don’t take “sorry, we can’t do that” as an answer from your existing financial institution.

Additionally, set up your savings, checking and the sub-savings accounts to have internet-access via your home computer, free of charge.   This will allow you the convenience of budgeting and bill paying from the comfort of your home.  If you are uncomfortable using internet-access for banking purposes, there are just a couple things to be aware of and you will be fine.  First, only use a reputable bank or credit union.  They have the best security in place for all of your data access requirements.  Follow their password guidelines and change your password regularly.  In my book, I dedicate an entire chapter to Virtual Envelopes and how to set up your sub-accounts.

Virtual Envelopes Advantage #2: Works Hand-in-Hand with your Cash Envelopes and Budgeting Worksheets

Has the cash envelope system gone the way of the dinosaur?  No!  I still recommend it for all of their budgeting categories for children and for the cash spending categories for adults, such as food and walking around money.

Virtual Envelopes can co-exist with Cash Envelopes just fine.  Use the Virtual Envelopes for those monthly expenses that you would normally write a check or electronic payment.  Examples would be mortgage/rent, taxes, car repairs, utilities, savings, debt pay-down, etc.

Our budgeting worksheets incorporate the strategy of using Virtual Envelopes and help you set up your accounts accordingly.  We define auto-pay, e-check, and other banking terms that will guide you to set up your Virtual Envelopes effectively in managing your monthly budget.

Virtual Envelopes Advantage #3: Safety, Convenience and Flexibility

The biggest advantage of Virtual Envelopes is that your money is safe in a banking institution instead of cash in envelopes in your house.  Just imagine if you had a robbery, fire, or just plain old forgot where you put that cash envelope with your rent payment.  Not a fun time trying to recover that!

With Virtual Envelopes your money is not only safe but you can access your accounts any time from the convenience of your computer at home.  You will be able to see the account and sub-account balances for each of the budget categories.  You will also be able to move money from one budget category to another when necessary and also move money into your checking account when it’s time to pay bills.

What could be better?  Virtual Envelopes are based on the proven fundamental budgeting technique of Cash Envelopes, but thanks to modern technology can now provide the ultimate safe, convenient, and flexible solution for your monthly money management.

Get Started with Virtual Envelopes Now

Any time of the year is a great time to take inventory of your current financial position.  Check out Virtual Envelope resources including our Personal Finance Book and corresponding Budgeting Worksheets and put Virtual Envelopes to work for you.  At our blog, budgetingmoneytips.com, you’ll find a whole host of articles that will help you get started.   If you need one-on-one coaching, we can help you with that too with our Budgeting Coaching Program.  It will be well worth the investment of your time.

Michael T Kastler is a Budgeting Coach, author of a personal finance book, “Get a GRASP on Your Budget and Your Cash” and multiple budgeting worksheets. His budgeting money tips blog that helps individuals become debt free meet financial goals can be found at http://www.budgetingmoneytips.com

Copyright 2011  Kastler Consulting Group, LLC  |  All rights reserved

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Credit Unions rock!  What I like most is that credit unions provide the capability to set up “sub-accounts” which are basically the ‘virtual envelopes’ that I discussed in the previous Electronic Banking blog.

I have been using my credit union for over 5 years and the sub-account capability, friendly service, security, and local community focus are the big reasons why.  I like the idea that I can walk in and they know me, serve my needs in a friendly manner and offer as much or more than banks.  And yes, deposits are insured by the National Credit Union Agency (NCUA), similar to the FDIC for banks.

As I state in my book, virtual envelopes are one of the key strategies to sound financial budgeting and replace the outdated cash envelope system.  The ‘sub-account’ is the tool that allows you to create virtual envelopes at your credit union.   The ‘sub-account’ capability is typically not available at a bank, at least not in my geographical area.  Hence, I do business at my local credit union where I have a savings account, a money market account, and a checking account.  (I also have a business account, but that’s beyond the scope of this blog).

The money market is used to hold medium term savings which are items 1-2 years out.  The checking account is used to pay bills from, either by check or debit card.  The savings account is where it gets interesting and basically holds only a $5 balance because it’s only an umbrella account.  Underneath that umbrella account are the ‘sub-accounts.’  I have 8 ‘sub-accounts’ that contain the money that I use to pay for the respective items in that category.  Here is a list of my ‘sub-accounts:’

• Real Estate taxes
• Home repairs
• Car repairs
• Season tickets
• Son’s college
• Vacations
• Charity
• Christmas gifts

Your list of ‘sub-accounts’ would be different based on your life circumstances and what you need to actively fund for the coming year.

These ‘sub-accounts’ are the virtual envelopes where you can deposit money and transfer money into and out of as needed.  So it’s a saving account, a virtual envelope, and a GREAT budgeting tool!

If you have any experiences or comments, please post!

Michael T Kastler is a Budgeting Coach and author of a personal finance book, “Get a GRASP on Your Budget and Your Cash” and multiple budgeting worksheets. His budgeting money tips blog helps individuals become debt free and can be found at Budgeting Money Tips.

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One past useful budgeting technique was to set up your saving/bill paying using the envelope system.  Basically it consisted of keeping separate envelopes for your spending categories and populating them with cash from your income source.  Then when a bill came due, you simply paid it from the appropriate envelope.

There are many disadvantages of this old technique in today’s complex world, such as keeping all that cash around. In today’s electronic world, there’s a version of the envelope system that can take the old proven approach and revamp it for the 21st century:  Virtual Envelopes.

By Virtual Envelopes, I’m referring to a set of sub-accounts that you set up at your banking institution to correspond to your spending (bill) categories.  When you deposit money, you simply allocate the appropriate amounts to the sub-accounts, based on your spending plan or budget.  It’s easy to move money around your various spending categories or sub-accounts if and when you need to.  When a bill comes due, you simply transfer money from the sub-account to your checking and then electronically pay the bill.

Most credit unions have the ability to set up sub-accounts and access via the web, for no charge.  For those banks that do not offer sub-accounts, there are alternative methods such as the  Mvelopes(R) fee-based system.  (We’ll have a separate review of Mvelopes(R) at a later time).

I have been using the sub-account Virtual Envelope method through my credit union for several years and it works beautifully!

Do you have any experiences with virtual envelopes and electronic banking that you’d care to share? Post them here.

I have dedicated an entire chapter in my personal finance book, “Get a GRASP on Your Budget and Your Cash” to Electronic Banking and the virtual envelop approach.

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