How an Electronic Envelope System Helped Us Pay Off Over $150,000 in Debt

You’ve most likely heard of the envelope system before. It’s a money management strategy that involves labeling physical envelopes according to major budget categories and putting the actual cash amounts into those envelopes.

The benefit to this system is the real-time feedback you get about how much money you have left in a specific category. Once it’s gone, it’s gone. It’s very difficult to overspend if you follow this strategy.

But it can be high maintenance, and even risky, to keep all of your cash in physical envelopes inside your home, car, or wallet/purse.

You Need a Strategy

Sometimes I forget how much our methods mattered to our success while we were paying off debt. It wasn’t just about the effectiveness of a strategy. Aligning ourselves with a strategy gave us motivation and hope.

Some days we felt like quitting. Having an automated system in place gave us enough support and motivation to shake it off, put our minds elsewhere, and keep going.

We took the envelope system to a different level. We called it the Electronic Envelope System.

I want to share this method with you today since it was a key part of our success of paying off over $150,000 in debt in 3.5 years, while in our 20’s.

I hope you find it helpful!

Psst… Want to get to know more about me? Take a look:

Is This Method For You?

I don’t recommend this method for most people. You really have to LOVE and be OBSESSED with getting out of debt for this to work. This pretty much sums up my attitude while I was paying off debt. I think I had an unhealthy obsession with it and spent many nights working and re-working our plan.

You can decide if it makes sense to use part or all of this method to increase the effectiveness of your budget. So let’s get started.

Note: We’ll assume that you already have a budget created.

Let’s use the following budget as an example. This was actually my budget, at one point, while paying off debt.

Step 1 – Find a Bank with Free Checking

I used USAA Federal Savings Bank to do this because my wife was already a member. This is an excellent online bank. Easily the best bank I’ve ever used.

They don’t have many brick-and-mortar locations, so their online presence is extremely well developed. Their website and mobile app are top notch, and always have the latest features before most other banks.

USAA’s customer service is fantastic and knowledgeable 98% of the time. I’ve only had one or two calls where someone wasn’t that great, and I was surprised by it because it’s so unusual.

Enjoy free checking with free ATM usage nationwide, easy online and mobile solutions

Did You Know?

If you have a parent or spouse who has served in the military, they are eligible for a USAA membership. Once they become members (and hold USAA auto or property insurance), you become eligible for USAA membership as well.

Once you join up, your spouse and children are eligible for USAA membership. There are a few caveats, so check this article out if you’d like more detail:

How to Become a USAA Member Even If You Aren’t in the Military

Capital One

Other banks offer free checking. I haven’t used them myself, but Capital One offers 360 Checking which appears to be completely free. Here are some links to check that out:

Bottom line, you need to find a bank that won’t mind you creating multiple accounts and also won’t charge fees for checking accounts. Otherwise, this process will get costly very quickly.

Step 2 – Create Checking Accounts to Match Your Budget Categories

All of the accounts I’m discussing can just be standard checking accounts. My bank tried to convince me to convert some of the accounts into savings accounts because they noticed the balances building up over time. Their suggestion was that I could take advantage of a bit higher interest rate if I converted those accounts to savings accounts.

However, with savings accounts, sometimes there can be limitations on the number of withdrawals you can make each month, and you can be fined for exceeding the limit. The increased interest isn’t really worth the hassle, so just stick with checking accounts.

Note: Look for the option to “not send debit cards” for these accounts. You won’t be using debit cards linked directly to them. That’s a lot of cards. And yes, you can end up with a lot of accounts. We have had upwards of 20-25 accounts using this method.

The first account you create is your “Bill Pay” account. This where all of your paychecks will go. You’ll notice on the budget that I’ve separated it into two sections.

The top section is for monthly items which are automatically debited from your “Bill Pay” account each month through automatic bill pay or automatic investing.

The rest of the accounts are simple. Just create an account for each budget category in the bottom half of the budget (Car Repairs, Clothing, Gas, etc.).

Note: For USAA, since opening a checking account requires $25 but has no monthly minimum balance requirement, I used the same $25. I just transferred it around as I opened each new account.

Check out USAA’s page on checking accounts.

Step 3 – Set Up Automatic Transfers

Set up automatic transfers to move the required amounts, according to your budget, into each of the target accounts. This will depend on when you get paid.

If you are paid weekly, just stick with a “bi-weekly” option on your transfer, if “weekly” isn’t an option.

If you are paid twice a month (semi-monthly), there should be a “1st and 15th” option for transfers. Here’s a quick view of some of our transactions:

Note: This is a live shot of our transfers, so the amounts won’t be the same as in the example budget

Take the monthly budget amount and work the math:

Let’s use Car Repairs: $35.

If you are using a bi-weekly transfer, here’s your math:

$35  *  12 months  =  $420 annual

$420 annual  /  26 bi-weekly paychecks  =  $16.15 transferred bi-weekly.

So the bi-weekly formula is: (N * 12) / 26

If you are using a semi-monthly transfer, here’s your math:

$35  /  2 paychecks = $17.50 transferred on the 1st and 15th each month.

So the semi-monthly formula is: N / 2

Complete this process for each checking account you have for your budget categories. It might make sense to combine certain categories, or to expand and break them out into separate ones based on your lifestyle. You have to strike a balance between the amount of upkeep you’re willing to manage, and the how precise you want your spending to be.

Step 4 – Create the Op-Ex Account

The last checking account you should create is an “Operating Expense” account. This is your main checking account. You’ll use the debit card for this account for all of your purchases.

Keep a buffer of $100-$200 in this account, but no more (we used $100). The cool part of this is that if you lose this debit card, you only have $100 exposed to a possible threat actor.

Any time you want to purchase something, you will make a corresponding transfer from the necessary account into your Op-Ex account before swiping your card. This does two things. (1) It slows down your spending because you have to think about it ahead of time and plan, and (2) It deters you from making impulse purchases because you will straight up get declined if you try anything over $100.

Having the $100 in there is nice because there are many simple purchases you need to make during the day, but not likely more than $100. So if you’re out and about, you can fill up the car ($30-$50) or whatever you need. Then, when you’re home, you can take care of the transfer.

If you’re tech-savvy, these transfers are super easy on your banking app, and you can do them in the car before you leave the store parking lot.


2 Lessons I Learned While Paying Off Debt

Step 5 – Use the Bill Pay Account

Remember that Bill Pay checking account you created in the first step?

I would recommend having a debit card for this account because it will allow you to set up automatic payments for online subscriptions. Some examples of bills which might be debited via debit card each month:

  • Netflix
  • Spotify
  • Audible

The rest of your bills can be set up for bank draft. There are two methods for setting up most automatic payments (without using a debit/credit card).

  1. You can use your bank’s Bill Pay where your bank cuts a check to the biller for the amount and frequency you set. This is configured and managed with your bank.
  2. You can provide the biller with your checking account number and bank routing number. This is configured and managed with your biller.

Some examples of payments we make out of our Bill Pay account:

  • Electricity bill (monthly, different amount based on usage, we get an email receipt)
  • Internet bill (monthly, fixed bill)
  • Cell phone bill (monthly, auto-transfer a fixed amount to mom-in-law’s checking, we use a family plan)
  • Homeowner’s Insurance
  • Auto Insurance
  • Life Insurance
  • Daughter’s Coverdell ESA (college savings, automatic investing)
  • Car Fund (automatic investing)
  • Real Estate Fund (automatic investing)

Key Takeaways After Using This Method

  • Spending money is hard!

Just like a physical envelope system, we had to check to see if the money was available in that account AND make a transfer to our Op-Ex account in order to spend it (if over $100).

  • Extremely effective in limiting over-spending

Related to the first point, but the flip-side of the coin. This method was crucial in helping us pay off $150,000 in 3.5 years. It’s amazing how much money slips through the cracks when you aren’t paying close attention.

  • Mostly automated system

Once the system of accounts and automatic transfers are configured, this system is on auto-pilot. We might have modified one transaction or two every few months if we wanted to tweak our budget, but it was pretty simple to do so. We’d just update our budget, then update the auto-transfer in our online banking account.

The only part that isn’t automated is the spending and transferring of money to cover new transactions.

  • Push as many monthly expenses to your Bill Pay account as possible

All monthly bills that should come out of the Bill Pay account. Since paychecks are being deposited straight into this account, you don’t have to transfer that money, and it can be debited automatically by whatever subscription, utility, mortgage, or other company. This minimizes hassle.

  • Having separate his/her spending accounts is awesome

The luxury of her having HER envelope, and me having MY envelope?  We don’t fight about money. Each of us gets some cold hard cash to spend on our dirty pleasures, and there’s not a thing the other person can say about how it was used or why. The only difference is, she always has more money than me because I spend mine the minute I get it. Hey, it’s guilt-free spending money!

Our old budget above shows $25 for spending, and yes we’ve gotten it down that low before when we were seriously motivated. There was a 6-month period after we became debt free that I had $300 a month for my spending. I realized soon after that this was not making me happy and that I was just burning cash. Today, it’s $50 for me, and $75 for her ($25 extra for buying quick meals for the kids while she’s out and about).

  • Watching those envelopes fill up is motivating

The accounts all started at $0. Soon, they all had something in them, and at certain points, they’d each have between $200 and $700 (depending on the account). We realized that we didn’t actually spend *that* much on those categories, and we would tune the budget amount down over time to get the amounts closer to what we actually spent month-to-month. This freed up more money to throw at our debts. I’m telling you, it works.

Use it, Don’t Use it, It Saved Our Lives

So there you have it. This electronic envelope system is one of the major tools that got us completely out of debt. Our lives have changed, we have cash flow like mad, and our biggest problem is “how can we make our money work harder?” We don’t think about debts, we don’t stress about monthly bills.

We don’t use this exact strategy anymore because we are done with debt and are happier accepting that some of our money will slip through the cracks, and we’ll over-spend here or there. We still use automatic transfers to pull out savings/investing, but we’ve gone from over 25 checking accounts down to just eight, and we’re using Mint for rough budgeting.

If you’re a spreadsheet whiz and a bean counter at heart, this is probably something you should jump on right now.

If you’re not a money planner to begin with (why are you reading this?), I would say that this method is going to cause you more stress than it’s worth.

Maybe you can identify something in my strategy that will work for you, and you can leave the rest.

If you do, I would love to hear about it!

How about you?

What crazy money methods have you used, or are you using to get out of debt? Please share with me! Also, if you liked this post, please share it and subscribe below for more like this!

18 Replies to “How an Electronic Envelope System Helped Us Pay Off Over $150,000 in Debt”

  1. Definitely need a plan when getting out of debt. I had student loans and CC debt a few years back and my plan was to pay it as much as I can every time my pay check came in. So I gave myself $100 cash and use it for the month, could not spend any more than that. The rest of the my paycheck went to my CC payments and student loans. It worked out effectively since I wiped off CCs debt in six months and my student loans(with the help of cashing out my investment account) thereafter.

  2. Seem like how the YNAB tools work. You budget youvmoney in categories and can inly budget money you have so that way you are not overspending.

    Great post, I love to see how everyone is doing their budget.

    1. Ramona, thanks! It really helped us create the same concrete boundaries with cash but without the liability of losing those envelopes. I will say it was a lot of work, and we’ve since found an easier, albeit less exact method.

  3. I just started this last month and am using USAA as well… I love them. I actually don’t have a debit for my bill pay acct but I carry two 1- my fun$$ and 1- gas/groceries. It has helped me so much. I tried the envelopes several times and couldn’t do it… I hate cash for gas … I order movie tickets ahead online… ect. I only have 8 acct but I use one as a sinking funds acct and track the breakdown on a spreadsheet. Thank you for the inspiration… I finally feel success

    1. Siobhan, this is wonderful to hear! I’m so happy to hear about people finding and employing a method that works for them. Spreadsheets offer so much detail and control over where your money is going. Keep it up! When I was paying off my house, I used spreadsheets in a major way.

      Again, thanks so much for sharing your success. Let me know how it goes, or if you have any questions along the way? You’re awesome!

    1. Hi Jim, I don’t offer a service like that. I think you could probably contact your bank and tell them what you’d like to do, and they’d help you get your accounts set up. I hope that helps!

  4. I know you wrote this a whole ago, but I just stumbled across your site when I was trying to describe how some non- military members would be able to join USAA (thanks for breaking that down so clearly!) I use YNAB which is basically an electronic envelope system that can be connected to one or more accounts (you can have it connected to import transactions or go 100% manual), and while we are at a less grueling pace, we still have paid off all of the old credit cards, 1 out of 2 vehicles, and are on pace to finish paying off the 2nd vehicle soon; then on to knock out the student loans! Oh the relief to know that we have a plan and are going in the right direction!

    1. MommyMoRN, we actually ended up switching to YNAB in February of 2018, and it’s been brilliant! I plan to write a post about our experiences on the platform in the coming months. Nice job on paying off so much debt!! I love it.

  5. Found this and what a great idea! After doing this I found out that USAA has a new rule as of this date: the maximum number of accounts you can open is 4 accounts within a 4 month period. After the 4 months you are able to open more. 🙁

    1. Interesting update! I’ve since moved on to You Need a Budget, and it works wonderfully. I use a single checking account to manage 90% of my cash on a day-to-day basis. It’s a nice change.

  6. Thanks for this awesome post- I have YNAB but can’t figure out how to merge this system with theirs….could you give your breakdown? The multiple checking accounts is what I started with but hit the maximum and would LOVE to just automate with YNAB but can’t figure out how to wrap my head around it! Thanks!

    1. Hi Kristi!

      I really need to do an update post on this topic because I’ve since moved onto YNAB, and found that it has seriously reduced the amount of time I spend budgeting each month. There are some kinks with the app, but otherwise I’m extremely happy with it. Absolute game changer.

      I’ll work on something and get that out this summer. If you want me to let you know, just join the mailing list, and I’ll send out the link.

  7. I’m so happy to have found this! This is exactly what I’ve been envisioning my debt pay off plan looking like but I wasn’t sure if it was even allowed to have that many checking accounts. I’m going to set this up tomorrow. Thank you for the guide, I’m feeling more debt free already!

    1. Nice, Brittany! Super happy to hear about you going down the path of becoming debt free. Becoming debt free will forever be one of the marquee moments of our financial success.

      No matter what methodology you use, the point is that you pick something and go with it. The absolute best system for managing your money is the one that you actually use. If you’re not using it because it’s too hard, it’s not the right system for you. That’s an over-simplification, maybe I’ll do a short post on the topic to elaborate.

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