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How to use a separate debit card for discretionary spending

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[Update: Added ghetto hand-drawn image below.]

One of my friends has been carefully watching her spending for the last few months. When she started tracking her spending, she noticed that she was spending an unbelievable amount going out every week. So she came up with a clever solution to control her discretionary spending.

She set up a separate bank account with a debit card. At the beginning of each month, she transfers, let’s say, $200, into it. When she goes out, she spends that money. And when it’s done, it’s done.

This is a nice take of the envelope system, where you decide how much you’re going to spend in each category and literally put cash in different envelopes. You can transfer from one envelope to another, but once your money runs out, that’s all you can spend for the month.


Tip: If you set up a debit account like this, call your bank and tell them you don’t want them to allow you to spend more than you have in your account. Tell them, “If I only have $30 in my account and I try to charge $35 on my debit card, I don’t want your system to let me.” Some banks can handle this request. (Schwab Checking can do this by turning off overdraft/margin protection, while Wells Fargo can’t at all because they suck and are useless.) If you don’t do this, you’ll run up tons of overdraft fees.

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  1. I wish there was some way to do this with a credit card! I like using my card for the rewards and benefits, but it does make it harder to notice how much you’re actually spending…

    • You could have the best of both worlds, I suppose, if you supplied the envelopes with cash that was withdrawn from your line of credit. (of course, staying on top of paying down the line of credit each time you take out a large wad of cash like this).

  2. I really like this post: very sensible and not at all crazy. More clever budgeting methods like this, please. Thank you.

  3. Hey nm, my credit card does this. I think it’s because it’s a student card though..

  4. It’s funny that you mention this because I actually set up a new account and got a new card just a couple of months ago! It works really well.

  5. When I first got married, my finances sucked. I had a credit card with like 20% interest – wow I know – and I spent money freely… Five years later, my wife has completely transformed me because of one thing. Every day, when I get home, I hand all of my receipts to my wife. Doesn’t sound like a big thing, right?

    The thing is, now, whenever I spend, I have to do a mental check to determine whether I want to be accountable to my wife for what I’m about to buy. Accountability it seems, is the best remedy for self improvement.

  6. In contrast to the above, I don’t really like this method for the exact reason that it is just a veiled version of the “envelope method” as you mentioned.

    This method does absolutely nothing to actually treat the cause of frivolous spending, and instead just allocates a certain amount that you have basically conceded will be wasted. I don’t get that at all. The next logical question is, how does one determine how much you are going to spend every month? The problem is, because this doesn’t do anything to instill proper spending habits, the entire amount is going to be gone at the end of the month. If you’re resorting to this method, it doesn’t seem like a huge leap to think that if you ended up on the 29th day of the month with $100, you’d be going on a shopping spree…

    That’s why I don’t think these methods should be ends. Means, maybe, because they are a good first step at curbing rampant spending. Since healthy eating analogies aren’t too uncommon with spending, this is like the equivalent of a fad diet that allows you to eat your 15 pieces of candy a week…BUT NO MORE! So on Friday you realize you have 10 pieces left and just shove all 10 down so you can allocate another 15 after the weekend. My point is this should not be a final destination along the personal finance path, because if it is it’s going to be as effective as xyz diet.

  7. Why not just use a prepaid debit card? You fund it at the beginning of the month and that’s it. Some I found are:


    I’m sure there are many others as well.

    • I use the American Express Bluebird Prepaid for this. It works great and doesn’t have any fees under most circumstances.

  8. I’m against this method too as you have mixed discretionary spending like eating out with an essential cost i.e. groceries. You have to eat but you don’t have to eat out!

    I think a far better method is to seperate out what you have to spend for example rent, bills, groceries etc plus a fixed amount for savings and then manage your discretionary spending seperately.

    I don’t really have a set amount each month that I plan to spend because as Nathan suggests it encourages frivolous spending at the end of the month. Instead I have taught myself to review each purchasing decision by thinking about what else I could do with that money in the long-term, for example that $2 coffee once a day costs me a dream holiday every couple of years. So I may end up spending the same amount in the long run but that holiday is worth far more to me than that coffee!

  9. This sounds like the Stackback’s Budget system. I just started this program this month. Hopefully it works out and I’m not compelled to overspend only because I’m not physically handling the cash.

  10. Nathan is missing the whole point. It’s about budgeting, and to get a grasp on what you are spending every month in a certain category. You should already have savings and your other main expenses covered. If you end up with too much at the end of the month then move the money over to savings. Nathan, the only person that can change your habits are you. You’re responsible enough and fortunate enough to know what to do with extra discretionary money.