How to Save Money with an Online Envelope System

(This post contains affiliate links.)

Are variable expenses reeking havoc on your budget?  Mine too!

I love the idea of the cash envelope system.  You put your budgeted amount of money in an envelope and only use that money for expenses in that category.

Simple enough, right?

For me, this works great for my grocery budget because I always pay for those in cash and my grocery budget is a fixed amount each month.

But for variable expenses that I pay online, such as the electric bill, it just doesn’t work for me.

I don’t have time to withdraw the money at the beginning of the month, put it in it’s envelope and then redeposit it when it’s time to pay the bill.

I’ve tried leaving the money in my checking account and allocating the monthly amount for the electric bill on paper, but when the bill comes in under budget, I end up spending the extra money on something else.

It also doesn’t work for me for annual expenses, such as life insurance premiums or property taxes.  I lack the self-discipline to let the money accumulate in my checking account for a year until it’s needed.  And when I withdraw the money each month and put it in it’s envelope, I often raid the envelope when something unexpected comes up or the grocery money is gone, but we need milk at the end of the month.  Sad, but true!

I finally found something that works for these variable or annual expenses!  It saves me money and time and it can do the same for you too!

It’s what I call an Online Envelope System.

online envelope system


Here’s how it works:

  1. Opened a checking account with an online bank, such as CapitalOne360.
  2. Each week have an automatic transfer set up to move the budgeted amount for annual expenses from your local checking account to this online account.
  3. Set up savings accounts tied to the online checking account, one for each budget category.
  4. Have a set of transfers set up for later in the week to transfer the budget amounts from the checking account to the individual savings accounts.
  5. When you need to pay one of the annual expenses, move the money back to your local checking account or use the debit card for the online checking account.
  6. For variable expenses, if the bill is under budget, move the extra money to the online account and pull money from the online account if the bill is over budget.

Online Envelope System

3 Reasons I Love an Online Envelope System:

  1. You can open an online account in just minutes, unlike going to a local bank where you need to wait for a customer service representative, fill out forms and sign your life away.
  2. I’m not sure about other online banks, but at CapitalOne360, I can set up saving goals for each of my budget accounts.
  3. My money is accessible, but not too accessible.  It’s not sitting in an envelope calling my name.  If I need to use this money, I have to log in to my account and transfer the money back to my local checking account, which does take a few days to post or I use the debit card tied to the online checking account.

Ideal Budget Categories for an Online Envelope System:

  1. Variable expenses:  electricity, heating, kids’ activities, home maintenance, car maintenance
  2. Annual expenses:  life insurance premiums, property taxes, Christmas gifts
  3. Any short or long term savings goals:  emergency fund, vacation fund, new carpeting, wedding

What do you think?  Would this method work for you?  I’d love to hear your thoughts!


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  1. Nicole says:

    OMG, I’ve been looking for a way to do this! Like you, I just didn’t think it made sense (nor did I have the time) to withdraw and redeposit money. I just recently opened up an online account with Capital One! I will definitely be giving this a try. Thanks so much!!!

  2. Christy says:

    We use CapitalOne360 for several different accounts as well! I love that you can have a bunch and they are all free, with great interest rates. I think for purchases though — it really should be cash. Not only groceries, but eating out, household purchases, etc. Paying with cash cuts down spending like none other!

  3. Tina @ Treasured Tidbits says:

    Love this! I do keep track of ours on paper and transfer overage at the end of each month but somehow part of it seems to always get used.

    I think we may try this soon .

    Thank you for sharing it at Sharing Saturday as well.

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