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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.

enveloping-system.png

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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51 Comments on "How to use a separate debit card for discretionary spending"

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nm
nm
8 years 5 months ago

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…

Jonah
Jonah
5 months 22 days ago

You could have the best of both worlds, I suppose, if you supplied the envelopes with cash that was withdrawn from your line of credit.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).

Jack
8 years 5 months ago

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

Brian
Brian
8 years 5 months ago

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

Bethany
Bethany
8 years 5 months ago

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.

Dave
8 years 5 months ago
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… Read more »
Nathan
Nathan
8 years 5 months ago
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… Read more »
Joshua
8 years 5 months ago

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:

1. http://www.greendotonline.com/
2. http://usa.visa.com/personal/cards/prepaid/visa_buxx.html

I’m sure there are many others as well.

Faunya
9 months 3 days ago

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

Mark
8 years 5 months ago
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… Read more »
Jason
Jason
8 years 5 months ago

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.

Tony
Tony
8 years 5 months ago

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.

Nathan
Nathan
8 years 5 months ago
Tony, I don’t think I’m missing the point at all. If you want to evaluate where you are spending money, that by necessity has to be after you have spent the money. You wont find me saying this is a bad idea, everyone should be concerned with where there money has gone. But these are two entirely different tasks to accomplish. One is where you have spent the money, the other is concerning proactive budgeting. They are not interchangeable. But I do adamantly believe this envelope theory of budgeting (and most others) are flawed because of one typical human trait,… Read more »
Nathan
Nathan
8 years 5 months ago

Please excuse the grammar and tense errors. Typing and hosting conference calls are not conducive to quality control.

Mike E
Mike E
8 years 5 months ago

One website you should check out is PearBudget.com, its sort of an online version of this that lets you keep track of your expenses each month, but can be used for keeping track of how much you spend too. And the best part is that its free for now, while its still in beta.

Frugal Dad
8 years 5 months ago

Great ideas here! We’ve been operating on an envelope budgeting system since January and have found our discretionary spending has really decreased. I like the idea of incorporating debit cards, too. I even know one guy who uses four bank accounts with four debit cards, one for each spending category. That’s little too cumbersome for me.

dave
dave
8 years 5 months ago
I have plenty of plastic cards in my wallet already. I have 23 expense categories in my budget file that I maintain in excel. Who would seriously want to have that many debit cards? More than two debit cards seems excessive and overly complicated. Wouldn’t you have to label them with tabs to tell them apart? Besides, the envelope system (whether it’s using envelopes or checking accounts) carries a huge opportunity cost. Let’s say you clear $3,500 a month, and you spend $3,000 of that. If that $3,000 never sits in a savings account, you’re missing out on a lot… Read more »
Carlin
Carlin
8 years 5 months ago
Because something might not work for you doesn’t mean it’s a stupid idea. If it takes putting money in envelopes or separate checking accounts so a person doesn’t spend more than they earn and know what they’re spending on (the primary purpose of this system), then so be it. The primary purpose it to get people to think about what they spend and budget. It’d be more constructive to think of ways to improve the system instead of telling people that are using it successfully why it doesn’t work (it obviously does), or why it wouldn’t work, or that’s there… Read more »
George
George
8 years 5 months ago
So, I took the survey posted on this blog. In response to one of the questions, I gave some of my methods for budgeting. This post is almost word for word matched to my response. So, here is my rationale for budgeting this way. My wife and I manage our money together. We set aside a certain amount for savings, set expenses for things like rent and utilities, and then our household expenses. Rather than dictate to my wife exactly how she should spend every single penny of the money set aside for household expenses, (too controlling, too much effort,… Read more »
J. Welch
J. Welch
8 years 5 months ago

“Added ghetto hand-drawn image below” pretty much destroyed my opinion of this article.

AImee
AImee
8 years 5 months ago
Putting money into savings/retirement is one of your “neccessary” expenses right up there with paying rent/mortgage, utilities, insurance, etc. as in you do it BEFORE you fund your envelopes. You use envelopes only for those expenses that aren’t a set expense each month, such as clothes, gas, groceries, etc. The envelope system works well for those of us who have trouble managing money when it isn’t something concrete. Over time you do learn not to spend on frivilous expenses because you know that you only have what’s in that envelope for the rest of the month (and you can feel… Read more »
Adam
8 years 5 months ago
I like this idea a lot! Great tutorial! Here’s a couple concerns though: If your problem is spending too much when you go out, like at the bar, and you’re using a debit card to pay…what happens when your tab is over the amount left on the card? Then your bank denies the transaction (as you’ve asked them to do), and you have no way to pay for your tab. This would force you to use your other/normal debit card to pay, which would come out of your normal checking account, which kind of defeats the purpose of having a… Read more »
Jake in IL
Jake in IL
8 years 5 months ago
I don’t like this idea for one reason: Debit cards are evil. Now why would I say this? Because I believe in the Golden Rule of Finance: He who has the gold makes the rules. If you have an issue with a bad charge to a debit card, it is in the bank’s favor to delay fixing it and putting the money back into your account. With credit cards (which I am a big fan of using), it is in the bank’s interest to get the issue resolved; they can’t get any money until the billing cycle after the issue… Read more »
0% credit card offers
8 years 5 months ago

I like the way you are trying to prevent overspending and budgeting by using the envelopes. Very unique! I actually know a guy that in attempts to prevent him from splurge spending on his credit cards he took them put them in a bowl of water and stuck it in his freezer. He told me that he never splurge spends anymore because he doesn’t have enough patience to thaw his credit cards. He said by the time they have thawed his desire to spend will be gone.

Aaron
Aaron
8 years 5 months ago
My wife and I have for years kept a separate “spending money” account from which we withdraw cash for dining out, movies, and other discretionary spending. It keeps us from bouncing checks and overdrafting because our required bills come out of a different account. BTW, I have a portion of my paycheck direct-deposited into the account. I will say, however, that it was not until we started using an envelope-based budgeting system that we really started to see our financial situation improve. We have always budgetted by categories, but we were not in the habit of “setting money aside”. So,… Read more »
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[…] For those with a fuzzy grip on spending, this technique could make the numbers seem pretty firm. How to use a separate debit card for discretionary spending [I Will Teach You To Be […]

Katie
8 years 5 months ago

Separate debit card a great idea. You mention “…while Wells Fargo can’t at all because they suck and are useless.” Thought your readers would like to know that they can share this kind of feedback on all financial products and services at http://www.Geezeo.com

Rick Roberts
8 years 5 months ago

This is EXACTLY what I have done for years, but you have to be very careful. Banks will approve transactions that send you into the red just so they can charge your NSF fees. They are pure evil, plain and simple. I called once and asked how in the f*** did I have overdrafts? I don’t write checks! If they money ain’t there, don’t approve the f****** transaction! They really piss me off. Can you tell?

Laura
8 years 5 months ago
This is exactly the system that I use too. I like it so much because I can use it places where only a credit card would work as well as be able to write checks from the account or withdraw cash. This wouldn’t work with the envelope method. My bank lets me send a text message from my phone and they automatically message me back with the amount left in each account, so I can check how much I can spend before running up that tab. I have a few accounts like this for my discretionary/frequent spending budget categories that… Read more »
evie
evie
8 years 5 months ago

J. Welch, you’re nuts. The artwork MADE the article.

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[…] For those with a fuzzy grip on spending, this technique could make the numbers seem pretty firm. How to use a separate debit card for discretionary spending [I Will Teach You To Be […]

Brian
Brian
8 years 5 months ago
I have been doing this for a couple of years and it works great. I have my employer deposit a fixed amount in one account, and ther rest in the discretionary account. I pay all of my bills with the first account. I use automatic payment here for stuff like mortgage, insurance, utilities, savings, etc. I never write a check and I never miss a payment. The other account I use for my day-to-day money, andwhateve Is left over at the end of the month goes into savings. At the moment, I am saving so much money, that I don’t… Read more »
Mário Sérgio Coelho Marroquim

Great Tip. I will star doing this stuff today.

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[…] um excelent post de um blog que leio muito. É sobre como controlar gastos de uma forma muito simples. Leia e […]

Richard
8 years 5 months ago
I blogged about this technique recently. I work in a financial institution (Bank of America) and not only have I set up my accounts like this but I highly recommend it. What I do is I leave myself basically just enough to pay the bills and for moderate entertainment. ( I probably leave myself too much. ) Every month I run out faster than I would like, but I found that it was similar even when I left myself more money. I was always running out no matter how much I put in! So I have the rest of my… Read more »
Jo Taylor
Jo Taylor
8 years 5 months ago

I use Mvelopes.com for this purpose. It does not physically stop the spending, but I know everytime I look at it (usually every day) how much is available to me in the various envelopes I set up. I also like that my info lives on a server instead of a hard drive that I can spill my coffee into. Sheesh.

Sandra
Sandra
8 years 5 months ago

I record debit card transactions in my check register, and also credit card purchases. I just bracket the credit card amounts and add them up separately as I go along. You could use a separate register for credit card transactions, but my preference is to do any chore with minimal number of steps. This way you have a running tally, don’t have to do mental math if that’s a challenge.
Sandra

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[…] Ramit at I Will Teach You to Be Rich recently shared a similar concept: How to use a separate debit card for discretionary spending. The beauty of his system is that you can apply it to all your expenses, not just to isolated […]

Jesse
8 years 5 months ago

I actually use this very thing, although I do a modified version that has big buckets. I have the “absolute set expenses” which come out of one, and “varying expenses” in another. There are people who don’t need this kind of separation…I am not one one of them 🙂

Jarick
Jarick
8 years 5 months ago

My system:

Pull out $40 every weekend for pocket/beer money.

Put away $100 a month to a savings account to save up for more expensive items.

You need some cash on hand if you want to have a social life, this keeps it under control. Likewise, most everyone wants to buy things, so you set the money aside. The amounts will very, but it works for me, even if I’m not 100% strict.

Either way, it’s essential to me to slow down the discretionary spending by not allowing myself full access.

Technogal
8 years 5 months ago

Thanks 🙂 very useful information..
A for me…
Long time ago.. I learned my self how to control my spending!
I’ve opened a saving account and set the monthly transfer automatically from my Salary account to my saving account through the electronic banking service, convincing my self that what in my primary account is my actual salary and totally forget about the amount of money transferred to my saving account. I don’t even hold a debit card for my saving account. and no matter what happens never used my saved money. I just keep them for something worth the spending!

DavidS
DavidS
8 years 5 months ago
I have a credit score of about 800 and won’t exactly have a problem shopping for a new credit card if desired. If banks want to compete for my business, there’s one feature they could easily add: Categorization and Email alerts. I want the ability to set up a budget inside their website and for purchases to be automatically “deduced” from these budget categories every time I swipe the card. At the end of each day, I want an email from them telling me how much I spent in various categories and how much is “left” for the month. If… Read more »
p shorr
p shorr
8 years 4 months ago

I am interested in talking to someone off line who has created one of these debit card envelop accounts. I am a TV producer, and would like to learn more about it, and potentially to shoot a story about it. I would be happy to take comments offline, if that is allowd.

skadoo323
skadoo323
8 years 4 months ago
A system of enveloping I have heard of being used is when people open ac account with an online bank of their choice and then they open multiple savings accounts. Each saving account represents the envelope in this case. For example, one account for your mortgage, another for car insurance, another far a particular credit card, etc. This system works well if one has their paycheck or such being direct deposited into the bank’s checking account. Then you just transfer the funds to these envelope accounts and you instantly know what money is left to be saved or can be… Read more »
sandra
sandra
8 years 4 months ago
My husband and I do this same thing with cash. but we take it a step further. We each get 60 dollars every 2 weeks in cash as an allowance. This is money we can use for whatever we want without feeling guilty and believe me that is important to us. Like the debit card friend, when our cash is done it is done. Our spin on the envelopes system is that at the end of every two week period I take the cash that my husband and I each have left over and deposit it in our savings account.… Read more »
Bill
Bill
8 years 4 months ago
I recently adopted this system after being completely screwed by wells fargo for $300 in overdraft fees. They couldn’t make an arrangement to prevent these fees in the future, so I found a bank that could. It took all day, I went to every bank in town, but finally found one who could waive overdraft “protection”, so that if the money wasn’t in the bank, the point-of-sale transaction simply will not process. It’s a great idea, I’ll let you know how it works out. Another budgeting practice I advocate is the One-Way-Valve savings account: it’s a basic short-term savings account,… Read more »
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[…] He’s also got great information on simple stuff college students can use, like how to use a separate debit card for an enveloping system, or more complicated topics like personal entrepreneurship or […]

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[…] at I Will Teach You To Be Rich shares a system his friend uses to set a firm amount of discretionary spending each month and then […]

JiminDC
JiminDC
7 years 9 months ago

I use a similar method, but I prefer to pay with my check card so that my money can sit in my Wells Fargo checking account and earn some interest. Instead of putting cash in envelopes, I write the budget category amounts on 3 X 5 cards. Whenever I incur an expense, I deduct it from the amount on the appropriate card. When the balance reaches zero on a card, that is it for the month.

Amber
Amber
7 years 8 months ago

I do this, in a way. Each paycheck I have an amount that will cover all of my bills (including rent) direct deposited into one account, and the remainder deposited into another. The second account is where I pay for gas, groceries, fun money, etc. I actually keep track of my spending at Neo Budget so I know how much is available in each category. (I save all receipts and reconcile my account daily because I need to keep myself accountable).

trackback

[…] eating out, groceries, entertainment, etc. A good method I’ve read about is called the “envelope method“. The method I’ve described above essentially creates a virtual […]

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