Cash Envelope Budgets for the Modern Age: Digital Zero-Based Budgeting
Budgeting is a way to determine how much money you have and how much you will spend on everyday expenses and long-term goals. Here you'll learn about zero-based budgeting to track your spending and save more money, and how it can be used in today’s digital world. Zero-based budgeting is also known as "cash envelopes", "cash stuffing", or "envelope budgeting". This budgeting method has been around for nearly 100 years, and is comprised of cashing your paycheck and immediately dividing up the cash to different expense categories in your budget and savings, putting them in labeled envelopes, and living solely off that cash until the next paycheck.
What are the Benefits of Zero-Based Budgeting?
Zero-based budgeting is a simple and easy way to manage your money. It can help you save more, track your spending, help you spend your money with intention, and make better financial decisions. It accounts for every dollar in your income, categorized upfront right when you get paid, helping keep your finances organized and solvent, and it providing a clear roadmap for how you will spend your money. It helps ensure everything important is paid for first and that you put your leftover funds towards meeting financial goals rather than getting trapped in the cycle of mindless spending on things you do not need.
Pros:
Helps you curb spending
Easy to save towards a goal
Simple to get started
Cons:
Can be harder to stick to without physical envelopes
Setup using some software can be time consuming
Challenging for those with variable incomes
Who Should Try Zero-Based Budgeting?
Zero-based budgeting works great for many people who have not had success with other methods because it plans spending to the penny. If you're looking for an organized way to track your spending, zero-based budgeting can definitely help. It's also great if you're on a fixed income and/or tight budget, if you want to save money, or if you are looking to get out of debt as quickly as possible. And if planning for the future is important to you, then this system will help ensure that your savings are going where they should be: into emergency funds, retirement accounts, college savings, and towards other long-term financial goals. One of the main reasons people like the zero-based budgeting system is because it allows them to see and feel the money coming in and going out.
Translating Cash Stuffing Envelopes Into the Digital World
In today's modern world we are almost cashless; using credit and debit cards as well as digital wallets like Apple Pay, Venmo, and Cash App to pay, and in many cases it's not even possible to pay cash for items and bills anymore. According to the Pew Research Center, roughly four-in-ten Americans (41%) say none of their purchases in a typical week are paid for using paper cash.
Walking around with stacks of bills isn’t practical or safe, so how do we transfer the paper cash envelope methodology to our modern, cashless, digital world? Instead of focusing on the currency, we start with the base of the methodology. At the core of the cash envelope system is a budget. Use the budget as the base, add technological tools, and now you have modern zero-based budgeting.
Digital Zero-Based Budgeting Tools and Apps
So how do you get started with the digital zero-based budgeting, without using physical money and envelopes? With the rise in popularity of debit card usage, there are now more options available for utilizing a digital "cash envelope" system, all without touching paper money or needing envelopes. Following are some options that provide convenient ways to implement a cashless digital envelope system, making it easier to manage your finances while leveraging the flexibility and convenience of digital transactions through debit and credit cards, Venmo, Cash App, and other digital wallets.
GoodBudget: With the GoodBudget app, you can plan your budget and track debt using the digital cash envelope system. You can also share with a partner/spouse and sync across multiple phones and with your desktop computer.
Qube Money: Qube Money positions itself as a contemporary cash envelope system. Instead of dealing with physical cash, you can simply use a single debit card and choose the digital envelope you wish to spend from before making a purchase. You can share with a partner/spouse, too.
Ally Bank Spending Buckets: Ally Bank offers the feature of creating "spending buckets" to help you budget your money. You can assign your transactions to specific buckets, enabling you to easily track your spending in each category.
Separate Checking Accounts: Another approach is to set up separate checking accounts for different budget categories and deposit funds into each account whenever you receive payment. This method requires a bank that allows you to have multiple accounts.
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How to Create Your Zero-Based Budget
To keep things simple, we've broken down the zero-based budgeting process into a few steps:
Categorize your expenses. This means bucket your expenses by type, like rent, pet care, dining out funds, and cell phone. Categorizing your monthly expenses not only helps you understand exactly where your money goes every month, but gives you a spending plan for each type of expense. Here’s how to prioritize expense types:
Needs are top priority. First put your income towards living essentials like shelter, clothing, food, transportation, and monthly debt/loan payments. This helps ensure everything important is paid for first and that you stay current on bills.
Savings is key. After designating funds for your essential items, you can start deciding how you'd like to spend the rest of your income. Ideally you should "pay yourself first," allocating funds towards important financial goals like savings before spending on wants like entertainment, dining out, and travel.
Wants are last. Life should be fun, so we all need a bit of money to spend towards entertainment, dining out, streaming TV and music, satellite radio, personal care, vacations, etc. These categories are where you have the most flexibility, trimming and even cancelling services. Tip: I suggest to my clients that they include a "fun money" line item of 2-4 % of their income that is for whatever they'd like to spend it on, whenever they'd like to spend it - including impulse buys.
Set goals. These could include things like paying off your credit card debt or making consistent savings towards an emergency fund. Additionally, it may involve putting aside additional money to pay off your college loans or increasing contributions to your retirement savings accounts. Instead of aiming big in your goals, consider smaller ones. Try to choose realistic goals you can meet within a few months so you achieve some wins. This can help your success momentum by keeping you motivated.
Allocate right away. As soon as you see your funds show up in your bank account, try and designate it into your categories right away, starting with Needs. By assigning your income its tasks, you’ll have a clear plan on how to spend it. It also helps eliminate bank overdrafts and running out of money before the end of the month.
Give every dollar a purpose. There's no "extra money" in zero-based budgeting. If you find you have "extra money" (lucky you!) allocate it to one of the categories where it can provide muscle to your financial health, like putting it into savings or paying extra debt payments.
Zero-based budgeting is a great way to manage your finances, especially if you have a consistent income and need a method that is organized and gives clear direction on how to spend your money each month. With some modern digital tools, it can be as effective and life-transforming as the old-school cash envelope method.
