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How to use a separate debit card for discretionary spending

Ramit Sethi

[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. avatar

    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…

  2. avatar

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

  3. avatar

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

  4. avatar

    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. avatar

    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. avatar

    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. avatar

    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.

  8. avatar

    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. avatar

    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. avatar

    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.

  11. avatar

    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, and that is to spend what you have left over. If you look at “budgeting” in monthly increments, you will only be concerned about your monthly gains. At a macro view, I think this puts entirely too much emphasis on the small picture in curbing the spend spend spend mentality while the overall picture is lost.

    If I can be fairly broad with my categorization of these techniques, I’d call them a lazy management technique. There is still no real responsibility other than to spend mindlessly until your envelopes are empty.

    If you think people who use these types of systems, by and large, still learn to use sound purchasing and decision making processes, then I would say you are mistaken. If everyone simply “moved the extra to savings” at the end of the month, I’d concede the point. But most people are not, they’re taking whatever’s left in the envelope, hypothetical or not, and blowing it because it’s “acceptable” in the sense that mentally, they’ve already accounted for it, and it’s already “spent money” to begin with. There is no incentive to unallocated and put it back into savings. That is why I am against this and every other “restrictive” form of budgeting that does treat the cause, it treats the symptom.

  12. avatar

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

  13. avatar
    Mike E

    One website you should check out is, 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.

  14. avatar
    Frugal Dad

    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.

  15. avatar

    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 of interest over a lifetime. This blog should encourage budgeting, but in a financially smart way. You should keep the bare minimum in your checking account to maximize the interest earned in your savings account. You’ll miss out on a lot of income if you follow this strategy.

  16. avatar

    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 a better way without saying what that way is (better for you may not be better for them). I wouldn’t do it myself, but it’s a good idea. I’d be more likely to use the prepaid debit card idea that someone had (not a fan of debit cards, and I don’t like to have cash sitting around).

  17. avatar

    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, too much arguing) she has a set amount and when it’s gone, it’s gone. This way she gets to buy 12 boxes of cereal or one nice steak. It’s up to her. And if we run out of food before the next paycheck (hasn’t happened yet) hopefully she would learn from the experience and budget better over the next two weeks. The point is that living costs money, and after making sure that the essentials like saving and utilities are taken care of, you have enough money for household things. But we never go over that amount. That to me is the perfect budget because you’re saving and you have the freedom to spend your “living” money on whatever you like. Thanks for listening. I welcome feedback.

  18. avatar
    J. Welch

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

  19. avatar

    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 the envelope getting smaller each time you take money out) and if you spend it wisely, you might even have some to carry over to next month (which I always leave in that envelope so I’ll build up cash in my clothes envelope). I make it a game to see if I can carry money over to the next month.

    Another thing, some of us need a little bit of money to blow on frivilous stuff. I make money to make my life more enjoyable and sometimes buying a tiara or a ticket to a really bad movie or a funky necklace that I may never wear is enjoyable. Yes, they are frivilous expenses, but they add joy to my life. What is the point of having lots of money if it doesn’t bring some joy into my life. As long as I don’t over spend on frivilous stuff, I think everyone needs a little money budgeted for frivilous stuff.

    I don’t think a debit card could actually replace the envelopes for me because it just adds a lay of complexity to my life and it’s not as easy to keep track of how much I have left for that budget item when I’m out running errands (as in away from my computer and access to my account balances – sorry I’m terrible at math and can not do it in my head).

  20. avatar

    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 separate account for leisure spending.

    Also, I have automatic overdraft/margin protection turned off at my bank, and I found out (the hard way) that not all transactions that will overdraft your account are processed immediately. So your card gets accepted, even though the purchase is going to overdraft your account the next day when the transaction is processed. Sad but true.

    Just saying, no matter how many debit accounts you have, you still probably need to keep an eye or mental note on how much you have left in each account before swiping the plastic.

  21. avatar
    Jake in IL

    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 has been fixed

    I do like a couple of the points raised by earlier readers: if you have more than 1 or 2 areas you are tracking, this gets difficult. Also, a prepaid card might be a good idea but I thought the costs of those are pretty high.

  22. avatar
    0% credit card offers

    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.

  23. avatar

    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, we would say things like “it woud be nice to buy a new couch”, we’d look at our budget and realize that over the course of a few months we should have the money for the couch, but then we would find months later that we never quite put that money aside and didn’t buy the new couch. I guess we knew what we should be spending, but didn’t enforce that spending plan.

    Now, with an envelope system, we have a budget AND a way to ensuring that we follow it. The “new couch” envelope gets some money each month and we don’t touch it for other things. It has done wonders for us. In less than a year and half now, we’ve paid off all of our old non-mortgage debt and have actually saved money for the things we want/need.

    I can’t really explain it. I know it doesn’t make sense that having envelopes is really different from budgetting, but for us it works.

  24. avatar
    Use a Separate Debit Card to Control Spending [Spending] » Lifehacker, tips and downloads for getting things done

    […] 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 […]

  25. avatar

    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

  26. avatar
    Rick Roberts

    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?

  27. avatar

    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 are hardest to control otherwise.

  28. avatar

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

  29. avatar
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  30. avatar

    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 know what to do with it all. 🙂

  31. avatar
    Mário Sérgio Coelho Marroquim

    Great Tip. I will star doing this stuff today.

  32. avatar
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  33. avatar

    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 money direct deposited over to another bank. I am saving $400 every paycheck, which has added up very nicely over the past couple months.

    I used to worry every time something went wrong (vet bills, car repairs etc) but now I’m pretty self assured knowing that if I do have an emergency I have a cool couple of grand chillin out at the bank. It’s awesome.

    I totally dig your posts. Keep up the good work.

    – Spicer

  34. avatar
    Jo Taylor

    I use 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.

  35. avatar

    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.

  36. avatar
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  37. avatar

    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 🙂

  38. avatar

    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.

  39. avatar

    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!

  40. avatar

    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 the amount I have left in any category is low when I make a purchase (such as at a gas station or restaurant), I want an immediate text message sent to my phone telling me.

    No overdraft fees, I can still enjoy the 1% cash-back bonus of a CREDIT card and I can enjoy the ability to actually track budgetary expenses.

    Will a credit card company (bank) ever do this? Imply some limit even if requested and categorized? Maybe they don’t because that will make you limit your spending with them. But, CHASE (my bank), this is what I want. Make it happen.

  41. avatar
    p shorr

    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.

  42. avatar

    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 spent. In a sense keeping you in check on your budget. Plus you will be earning interest on the several bank accounts, which is a nice thing. Some online banks allow a limited number of accounts, but others such as ING Direct, ETrade, Provident Direct, etc will allow multiple savings account allowing one to create a virtualized envelope system.

  43. avatar

    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. Sometimes it is two dollars and sometimes it is twenty two. You’d be surprised how quickly that money can add up. We already deposit a regular amount into our savings but little bonuses like this help us climb towards our savings goals that much faster.
    I also have learned to only carry one twenty at a time in my purse. I stash the rest of my allowance somewhere at home and take it out as needed. This way I am not tempted to spend it on things I don’t really want. I have to think about my purchases because it involves going home to get the cash and coming all the way back to the store. Most of the time I don’t want anything that bad.

  44. avatar

    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, but the only way to take cash out of it is in person, during business hours, at the branch. No checks, no card, no online transfers. I came up with the idea a while ago, when I was a raging alcoholic, as a way to avoid spending rent money when I was falling-over drunk on the weekends. I had to walk all the way to the bank, during business hours, sober before I could get my hands on the money. The money was automatically transferred every payday, so I hardly noticed how much money I was saving and learned to spend within my means the hard way. I recommend this as well as the above plan to anyone who is terminally irresponsible.

  45. avatar
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  46. avatar
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  47. avatar

    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.

  48. avatar

    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).

  49. avatar
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  50. avatar

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

  51. avatar

    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).