Many people who have or are currently trying to budget their money have heard of the envelope system.  If you’re one of those who haven’t, it’s a system in which you budget your money for the week or month in separate envelopes, in cash.

Digital Envelope System 2

Personally I don’t feel comfortable carrying all my money in cash, so I had trouble with this system.  But I still really liked the idea of having envelopes to sort my money.  I just had to find a way to make it work for me.

That’s where my Capital One 360 account comes in.

The setup of the 360 account is set up like this: You get 1 account, but you can create up to 25 sub-accounts – your digital envelopes – to organize your money.  You can attach your account to any traditional checking or savings account and transfer money back and forth as needed.

One of the things I really like is that you only get 10 free money transfers per month.  Why is that a good thing?  Because it makes you think and plan before you move your money around.

How to organize your digital envelopes:

Savings.  We have a traditional savings account through our credit union, but I prefer my 360 account for 2 reasons.  First, the interest rate is better.  If I’m going to have my money sitting there, I’d like it to earn as much money as possible.  Second, being in a separate bank makes the money accessible, but not readily available.  In other words, I have it and I can get it, but I don’t see it every day so I’m not tempted to spend it.

Remember that you should have at least 6 months worth of expenses saved as a cushion in case you can’t work for whatever reason.  I recently heard that in the even of a financial freeze the average American family would go through all of their savings in 3 weeks!  Yes, that’s weeks, not months.  Maintaining a savings account where money goes in but doesn’t come out is a key first step in your digital envelope system.

Upcoming major expenses.  Our boiler is original to our house – 30 years old – and we know it could die at any moment.  So we have a digital envelope with approximately enough to cover the cost of a new boiler.  We also have an account that we pay into for our next car purchase.  We’ve had this account for years (one of Mr. O’s awesome ideas), so we pay ourselves a car payment, then buy our cars with cash.

Annual, semi-annual, and irregular bills.  To save a 3% fee we pay our life insurance in semi-annual payments rather than monthly.  Instead, we pay ourselves the premium into a 360 account and transfer the money to our checking when the bill comes.  Another irregular bill is our oil.  We have automatic delivery so we can’t predict when they’ll show up, so we figure out what we pay each year, divide it by 12 and pay into our oil account each month.


Costs of living.  We are homeowners and while we don’t have any major renovations or projects coming up, we know that our house will need work every year.  Staining the deck, tree work, rebuilding the rock wall, and other various minor projects are always popping up.  We save a small amount each month for home improvements so that it’s there when we need it.  We also try to save a bit for furniture, though I’ll admit that’s the first item crossed off the list when we have a tight month.

Pet expenses.  Pets are expensive!  More so as they age.  We try to put away a few hundred dollars to cover Ferris Bueller’s yearly check-up and one other visit.  If you travel a lot you might want to include boarding fees in your savings goal.

Fun stuff.  Saving doesn’t have to be boring.  It can help you focus on your fun goals, too.  We want to take Miss O to Disney when she’s 7 or 8 and we’ve started putting money away here and there for that trip.  A friend is saving for a ski-mobile, and a colleague of mine saves for cool stuff for his Harley.

Keep in mind these are just what we do at our house.  There is no “right” way to save.  You have to look at your own priorities.

Depositor: personal loan

And don’t forget the other big savings piles – college and retirement!

If this seems like a lot to save, you’re right.  However, with the exception of your emergency savings, all of the money you’re saving is money you’d be spending anyway.  Are you going to go without oil for your heat and hot water just because you didn’t save for it?  No!  You’re going to buy it, then get hit with a huge bill that eats up all your money, or worse, you have to put on a credit card.

By setting your priorities up front you can not only get your financial house in order, you can earn interest off your own money and be prepared for whatever comes your way.

There are lots of online banking companies, but I highly recommend the Capital One 360 account.  I’ve been a customer since they were a brand new company called ING Direct and have never been unhappy with the service.  Account are free!

Digital Envelope System