Piggy banking / the envelope method / sinking fund = better budgeting!

Piggy banks are not just cute money jars for kids. Piggy banking is also a system of dividing your money into different ‘pots’, or accounts. Each pot represents a different aspect of your future spending.

This approach is also known as “sinking funds”, “jam jar accounting” or “the envelope method”. All of these names are basically the same thing.

Benefits of piggy banking

You may have seen people talking about piggy banking on MSE or Mumsnet forums. Or about sinking funds and cash envelopes on Instagram. They all sound enthusiastic… but is it right for you?

This approach can help you:

• to cope more easily with irregular and large expenses that don’t happen every month but which you have to save up for;
• automate your budget so you can avoid spending more than you earn;
• know how much you have to spend this month so you spend less time worrying about spending and more time enjoying it.

You can do this with cash OR using bank accounts

You can literally put the different amounts in cash into envelopes or separate jars or piggybanks. Hence the name!

Your parents and grandparents may have done this.

Even now this can work well if you are on a very tight budget and can pay for most things in cash. Here is a newspaper article about it: Savvy mum shares easy envelope system which helps her budget for her family-of-four.

This cash budgeting can be used for your everyday spending each week or month, food, petrol etc.

A variation of it can also be used to put money aside for bigger, longer-term bills. Saving up for a wedding, putting money aside for a tax bill etc.

But if a lot of your bills have to be paid online or by direct debits,  you can also use bank accounts to get the same level of visibility and control over your spending. In some parts of the country it isn’t easy to take cash out from your bank anymore!

You may be worried about having a lot of cash in the house. And in 2023 at long last you can interest paid on savings accounts that is worth having.

How does piggy banking work?

The idea of budgeting is not new. Lots of people find them an invaluable way of keeping track of their money. A budget is a great place to start to “balance your books” if you feel your spending is getting out of control. And if too much of your wages are going on repaying debts, a budget is important so you can see what your options are.

However, a traditional monthly budget can be difficult in that it assumes you spend much the same every month. But this isn’t how life works. Things like Christmas, birthdays and holidays mean that some months you will need more money than others.

You don’t want to use your emergency fund to cover these sort of costs. Your emergency fund is there for the really unexpected, not something that happens every December.

So piggy banking:

• sets up separate envelopes or accounts (see below for how) for these sorts of irregular expenses;
• feeds these accounts every month on payday;
• these accounts don’t have to be full current accounts – they can just be easy access savings accounts, so you move the money back to your “real” account to spend it.

You can make this more effective psychologically by naming your savings account. Labelling your account Dom’s holiday fund or Liz and Ally’s car expenses will remind you every time you log onto your internet banking exactly what it is you’re doing it for. It has been proven you are much less likely to dip into something if you have already mentally allocated it to something else.

Many people also like to set up a “Bills account” for the regular payments each month:

• this has to be a current account so you can set up standing orders and direct debits;
• this makes it simple for a couple to each pay their share of these bills, setting up a standing order to move the money across on paydays. This doesn’t have to be a joint account, see Should you get a joint account for Bills?;
• deals with a lot of your most important expenses – rent, council tax, utilities, insurances etc – so they get paid on time;
• makes it easy to see what money is left for the rest of the month – you don’t have to remember that the water bill gets paid in two weeks time.

Don’t go for too many accounts!

The aim of piggy banking is to make your life simpler.

If you have a pot for your regular car bills and one for unexpected car service costs and one for unexpected parking tickets you are making life too complicated – just have a single one for all car expenses.

Same for clothes, separate accounts for each of your children will just be a nuisance, put them all together.

Here one person talking about the six sinking funds she has decided to use in a year. The picture at the top of this article comes from her YouTube video.

What about debt repayments?

You can pay regular debt repayments – to car finance, loans, to credit cards you aren’t using, or your monthly payment to debt management or an IVA –  from the Bills account.

For credit cards you are using, you need to be careful that you have the Bills account funded properly to cover any increase in your monthly repayment. Otherwise, the larger payment to your credit card may be taken by direct debit leaving not enough money for another important bill.

Which banks let you have multiple pots?

 Some banks will let you set up multiple pots with them and allow you to give them names:

• Lloyds TSB Money Manager, which includes graphs to illustrate where your money is going’
• NatWest’s Savings Goals are similar
• Monzo‘s “pots”, Starling‘s “spaces” and Chase’s named savings accounts are great for the envelope approach and work well if you want to save for longer-term goals.

An app worth looking at is Hyperjar.

But getting an account somewhere apart from your normal current account can be good psychologically because it makes it that little bit harder to dip into the piggy bank account for a different purpose. So if you like the bank you use at the moment, you could also get a Starling account just to use for your savings pots.

Tips for setting up piggy banking

Piggy banking could be a great new way for you to keep track of your money. Follow these tips first before you take the plunge.

1. You don’t have to do it all at once. Only the Bills account really involves a bit of work because you need to change over direct debits and standing orders. And you can make that easier by just set it up for the really important bills at the start, and adding smaller things later;
2. If you are planning to open multiple accounts with different banks, don’t forget that each bank will often run a credit check on you – so it’s best not to open accounts with too many banks at once. Better to get an account with a pots facility;
3. If you are opening a new bank account, make sure it is paying a good rate of interest on the savings you will be holding;
4. You can also go for the best of both worlds and use cash for the things it really helps for and where it’s easy to spend in cash. And use digital account for the rest.

Sounding complicated?

It isn’t really. Setting it up makes you think about your bills and your income. But once it is in place you will feel much more in control of your money.

A lot of accounts do this on Instagram. You could set up an anonymous Instagram account and join the #debtfreecommunityuk there – it’s a good way to get support and ask questions. Find me there at @debtcamel.

Will you be tempted to dip into the envelopes and spend on other things?

Possibly. But you need to distinguish between temptation and realism…

The crucial first step is to have a realistic budget at the start. And in 2023 that will mean having a small buffer each month for inflation. £20 that you can dip into. If it’s unspent at the end of the month, add it into your emergency fund.

If your budget isn’t realistic, then you are always going to have to raid the cash in other envelopes for food, petrol etc.

And when there isn’t enough money for all your essentials and bills and debts, then shuffling it around with envelopes doesn’t really help – better to talk to a debt adviser about your options.

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