DifferentLI’s digital ‘envelope system’.

Pretty much everyone in the financial sphere has heard of Dave Ramsey and his envelope method. Basically you withdraw the amount of money that you have budgeted for each week/month in certain categories and you keep them in designated envelopes. For the rest of your money it’s out of sight, out of mind.

I tried this method but it was difficult for me to keep withdrawing amounts on time and I felt uncomfortable carrying cash everywhere with me! So instead I developed a digital compartmentalising system that works perfectly to keep my money away from me and in my savings account!

This system has helped me save thousands over the past year or so and has been key to keeping me on track with my savings goal!

The basics to my system are this:

1) You need two bank accounts, a Mothership and a Spending account (The Mothership is preferably a high interest current account like the Nationwide Flex)

2) You set up a standing order from the mothership account to your spending accout for only the amount you need in certain categories each week/ month. The rest lives in your savings account and accumulates money for you.

3) You need about two hours to set it all up and it’s done forever!

So two hours may seem like a lot but this is going to make things SO easy for you for the rest of your life! It will only need changing when you change a direct debit or your expenses change.

First of all I want you to Create a budget to help you figure out how much you need each week for food, travel and entertainment. You also need to know which direct debits you have coming out each month. Once you know this, write them down and you’re ready to begin. You will need at least two bank accounts for this, you can always expand them later on if you see a bank account that will offer you benefits for using it!

The Spending account

This is the account you will have access to on a regular basis, all of your food, travel and spending money will come out of this account. For me this includes my piano lessons, climbing days, gigs, eating out, train tickets along with my food shopping. These are things I will spend on weekly to enjoy my life and stay alive!

For me, I spend £20 a week on food, £15 a week on travel, £5 a week on catfood and litter and £10 a week on Fun so I have £50 in this account every week. I personally chose weekly because for me it works best knowing that if I do overspend, there’s only 6 days left until I have money in my account again. No splurging when I get paid and then having too much month at the end of my money!

How does this money get to my account you ask? Well it comes via standing order from….

The mothership!

*Cue high pitch alien music*

This is the hub of all my money! The mothership should be difficult to access but not impossible in case you need to change something. For example a current account that needs a card reader and pin to access online or a family member who will act as a guard.

If I just had these two accounts then the mothership is responsible for the following:

  • Receiving my wages every month- I get everything paid into this account on payday.
  • All direct debits like rent, phone bills, utilities, gym memberships are paid out of here (If I’m honest the only direct debits I have are my phone bill and Netflix)
  • All standing orders are set up for this account to landlords or savings accounts and obviously to your spending account.
  • For infrequent occasions like birthdays or one off payments like a railcard or MOT etc you can access this account to take out the money you need for that one occasion. Once you’ve gotten through your bank account bouncer to justify your expense of course!

So the first two steps are incredibly easy to set up, just email your work’s Payroll department with your new bank account details and change any direct debits you have to come out of this account.

The next step is setting up your standing orders and this is the part that takes the most time, mainly because you have to get it right for you.

DISCLAIMER: Before you start this step MAKE SURE that you have more money going into your account than is being taken out every month. Anyone who is in debt each month I highy reccomend not using this sytem until you have a buffer of at least £500 in the account and are spending less than you earn.

The reason for this is because you are generally going to ignore this bank account and you should not do that if there’s a chance you’ll have direct debits bouncing!

All good on that front? Good. Now you need to set up your standing orders.

  • First set up your weekly spending money to go into your spending account, Pick your day carefully as standing orders won’t be sent accross on weekends or bank holidays. Mine come in every Monday so that I don’t blow it over the weekend but bank holidays do sometimes delay that until Tuesday, so pick what’s right for you!
  • Second, maximise any savings accounts you have, I have a standing order to three savings accounts each month – £500, £250 and £100 to my holiday fund on the first of every month. (Make sure these come out at least four days after you’ve been paid in case of bank delays)
  • Thirdly if your spending account has any benefits- Mine pays me £5 every month to put at least £750 into it, set up a standing order of that amount into those benefit accounts and then set one up from the spending account back to the mothership for the same amount on the next day so it’s straight in and out! Remember to set another standing order up for that £5 benefit back into a savings account so it doesn’t get lost in your weekly spending!

If you’re a visual person like me, here’s what all this work looks like in a flow diagram without the benefits transactions.

Bank account flow diagram

Congratulations on getting this far! You’ve set up your money to start working for you and made keeping track of your expenses much easier! In case you’re wondering how you will benefit from this system I’ve put together this list to explain some of the ways it has helped me!

  1. No more worrying if there’s enough money to pay off your direct debits because it comes out of your savings account, there is definitely money in there! No late payments.
  2. Your spending account only gives you as much as you’ve decided you need so you can’t overspend on any given week and you have to stick to your budget!
  3. The Mothership money is in a high interest savings account that’s calculated daily so if your direct debits come out three weeks after you get paid then you accrue interest on that amount for three quarters of every month! Even though it’s earmarked to be spent.
  4. Any overtime you get paid is automatically in your savings account and you have no option to spend it because you don’t have to manually move it across into a savings acount, this boosts your savings a litttle every month without any effort! (Except physically working the overtime of course)
  5. If you do overspend on one category like fun one week, you don’t have to beat yourself up about it because in six days time you can start fresh and technically all of the money that week is for you to spend so why not spend it on something you enjoy?
  6. With all of this passive savings, your net worth creeps up on you and one day you’ll have way more money than you thought you did!
  7. If you have to spend out of budget on big items like MOT or Railcard or multiple time pass to the climbing center *COUGH* then you know exactly how much you’ve removed and can add it easily onto your budget.
  8. It’s a great way of keeping your expenses consistent even if your wages aren’t!
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