(This is a follow up to an earlier post “A Year with EveryDollar“)
One important aspect to help me keep everything organized is separating the money. The main tool I use for this is separate accounts, these accounts fall into 2 categories:
- [Virtual] Cash Envelopes (i.e. spending accounts assigned to a specific Budget Category)
- A Bank account Dedicated to a Specific Purpose. These are frequently referred to as Sinking Funds. (This is relatively new, before I was just putting the sinking funds into my main savings account)
Cash Envelopes / Virtual Cash Envelope
First let me explain what a Cash Envelope is, basically if you know you will spend X amount of money on Groceries every month you simply fill an envelope with that cash amount that is Budgeted for that Category. If the Envelope runs out, then that is it until the next envelope-stuffing day. (Granted when you first start out, you can be flexible about it, but you will need to adjust your budget so next month, you can avoid this issue).
NOTE: On YouTube you can find videos of people stuffing their cash envelopes for the month, this is how serious people take it and also how important a concept it is.
Why/What is “Virtual”?
In my area many stores do not accept cash (and also the smallest bill is €5), so using cash has some disadvantages, so instead I use what amounts to a Virtual Cash Envelope (i.e. a Card which has that amount of money available to it). I originally started out using a stored Value Credit Card,. However these have charges associated with them, it was useful, BUT the cost of topping it up defeated the purpose. Instead, I switched over to using a specific bank for specific categories.
In my area, there are several Online Banks available (Revolut and N26 are the 2 most common ones). Basically, on payday, my Grocery Budget gets deposited into one and my Dining Budget into the other.
(Both send my iPhone an alert whenever they are charged and I can also view the current balance as well).
The psychological advantage of cash: Having the money on a card does have a disadvantage. When you spend cash, your mind reacts as if it is a loss, but when you simply hold your card up to a scanner, that loss is not there. This means that people are more frugal with cash. If you have the option you may want to stick with a physical Cash envelope.
Some Free Bank / Payment Accounts
There are several Free bank accounts available, the 2 Primary ones I chose are Revolut and N26. I also have another account with Denizen which is also free.
- All Accounts are Free to open and have no charges. (If you want additional cards or services, they are available for a fee).
- These banks have no “Brick and Mortar” Locations (this is why it is Free)
- So, everything is done online via an iPhone App (with notifications when charges are made).
- Deposits can be made using the accounts IBAN number, so bank transfers in can be done fairly easily.
- Although written from an EU Perspective (all 3 have US availability)
(In my area many stores only accept Maestro Cards for payment. (Usually smaller, day-to-day, less touristy places). So that is why my 2 primaries are Revolut and N26, and Denizen is a Secondary. This may not mater to you depending on your needs / area).
For Revolut (when I got it) the initial card is free, if your area is like mine and the Maestro card is the preferred one, order this one. (I discovered the issue with with the Mastercard after I got it, so I had to order the Maestro card later and it cost about €5.
They offer a “Metal” Card for a monthly fee, and it does give rewards, for some this might be worth while.
I really like their App, in addition to payment notifications, it can be configured to give a graph your balance. (As well as comparing your balance on a particular day (i.e. how much did I have left at this point last month).
If you decide to get it, this is my referral link: https://revolut.com/referral/james5og!G10D21
(The reward can change from time to time, as of now it is a €10 credit to your account after an initial purchase, but it may change).
I just recently started using N26, my other bank only provided the Mastercard Debit and it was a little annoying (If a store did not accept it, I needed to send the money from N26 back into the payment account… this was to stay honest about budget categories). So far N26 has worked fine for all stores (once I got the Maestro card). Initially they will send you a Mastercard Debit. After depositing €100 you can get the Maestro card (in Germany, The Netherlands, and Austria).
There app is fairly good to an also offers instant notification, when transactions take place.
If you decide to use them, my referral link is: https://n26.com/r/jamesh3045
NOTE: When I got Denizen it was free, it looks like there is now a charge
The main reason I’ve stopped using Denizen was b/c they only offer a Mastercard. When I was out and about and trying to use it for its category sometimes it wouldn’t work. (I had to then use another card and then (to stay honest with the system) would need to transfer to the money to the Denizen account.
The advantage of Denizen, is if you are an American you may be able to create an ACH account with their US partner (also free) which can be use for MUCH easier transfers to the US, with no real fee.
One of the other techniques I use, are various Sinking Funds.
The best way to describe it is with an Example:
About once a year I get a bill from the City for about €800. Before I would setup an automatic payment and make partial payments for several months. Last year, I setup a monthly deposit to my savings account. (This was much smaller than the partial payment, so paying the money was a lot less of a burden). This year when I received the bill, it was so much more of a relief to just move the money from my savings account and pay the thing in full.
If you are able to open a High Interest Savings account, I would recommend using that for holding your sinking fund. I usually push a fixed amount 1x a month into the HYSA, it may be small but compared to the .03% getting 1% or better is a big improvement).
Hopefully this post gives some ideas on how to organize you spending with Envelopes and Sinking funds, so you can feel more confident with your finances and save more.
The post was getting really long, so I’ll put together another one explaining in more details how I use these pieces with EveryDollar.