We have been using the envelope system for one year. The system has worked incredibly well for us but at the end of the year we re-evaluated and made a few changes. Here is a recap of our original envelope system:
All of the above envelopes were allotted a certain amount of cash each week. The one envelope on this list that we've decided to make electronic is Gazelle. This envelope was building up quite the balance each month so we decided it would be safer to keep it in an electronic savings account. The three envelopes we added this year are: Miscellaneous Fees, Vacation and New Vehicle. All of these envelopes are also electronic.
Miscellaneous Fees includes things such as our Amazon Prime membership, Sam's Club membership, cell phone upgrades, fantasy football leagues, and other once a year expenses that really should be budgeted for but don't fit into any of the cash envelopes. It made sense to have these in a savings account because all of these items usually must be paid for using a card. We have $10 per week going into the Miscellaneous Fees fund for a total of $520/year. When the expense gets charged to the card, money gets transferred from the savings account to cover it.
Vacation money doesn't get spent every week, so we decided it made more sense for this to be held in a savings account. This fund gets a meager $10 every other week for a total of $260/year. The main goal of this fund is to provide spending money for any weekend getaways we might plan. Eventually we would love to increase this fund, but until the student loans are paid off it will stay as is.
Last but not least, New Vehicle. This is our Gazelle fund at the moment. Yes, according to Financial Peace University we shouldn't be saving up for a new vehicle until the student loans are paid off. However, our vehicles are now entering the high-mileage category and if one of them starts needing lots of repair work, we would rather be able to trade it in and pay cash for another vehicle than have to take out a loan.
Here's our new envelope funding system:
Everything until Mika is still kept in cash envelopes because these categories rarely build up large balances and it is convenient to pay cash for the expenses they cover. Vacation and Miscellaneous Fees are funded by automatic transfer, so they are built into the weekly budget. At the end of each week any extra money gets transferred into the New Vehicle savings account. Essentially we are using the same budgeting principles we started with, we are just letting the Gazelle fund accumulate money versus emptying it each month toward the next debt on the debt snowball. Once the New Vehicle account accumulates enough money for a reasonable, used vehicle, if both of ours are still holding on, we will pay off the first student loan. This way we are using the same gazelle-like intensity but saving ourselves from adding another item to the debt snowball.
Last but not least, we use Capital One 360 savings accounts for our various electronic envelopes. They offer the highest interest rate I've been able to find (.75%/year) and you can open up to 20 sub-accounts, making an electronic envelope system easy to organize and track.
We started this new system in December and it seems to be working quite well. It has caught the few random costs that weren't budgeted for last year and has helped keep us accountable to our budget.
"Dishonest money dwindles away,
but whoever gathers money little by little makes it grow."