Piggy banking / the envelope method – how to budget better!

Piggy banks are not just the cute pig-shaped money jars for kids. Piggy banking is also a system of dividing your money into different ‘pots’, or accounts. It is also known as “jam jar accounting” or “the envelope method”.

Each pot represents a different aspect of your life you need money for. So, for example, you might have one account for your most important bills such as the mortgage or rent, another for everyday spending, one for your car costs, and one for your savings goals.

Benefits of piggy banking

You may have heard the odd conversation about piggy banking on MSE or Mumsnet forums but not been sure if it is right for you.

It can help you –

• 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!
• prioritise your goals by showing how much you have saved.

Use cash or bank accounts to do this

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

Your parents or 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.

• a video from one person showing how she divides up her money in one week.
• a Sun article: Savvy mum shares easy envelope system which helps her budget for her family-of-four.

But if a lot of your bills have to be paid online or by direct debits, or there is just a lot of money and you don’t want to have that much lying around in cash, this article looks at how you can use bank accounts to get the same level of visibility and control over your spending.

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 in 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 always how life works. Things like Christmas, birthdays and holidays means 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 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.

Many people also 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.

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.

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 you and for each of your children will just be a nuisance, put them all together.

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 offer piggy banking?

 Most banks will let you set up multiple accounts with them and allow you to give them nicknames.

Some also offer specific money management services. A couple of examples are:

• Lloyds TSB Money Manager, which includes graphs to illustrate where your money is going
• Barclays Finance Manager
• Monzo‘s “pots” are great for the envelope approach and also work well if you want to save to longer-term goals.

You might also want to check out First Direct’s Internet Banking Plus, a money management system you can use regardless of where you bank – although you will need to have at least one of your accounts with them.

You can also open savings accounts with different banks. This isn’t to maximise your interest – these days there is very little on offer anywhere :(

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.

Four 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 much work because you need to change over direct debits and standing orders – you could just set it up for the really important bills at the start, then add 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. Too many checks on your credit file at once can spell bad news;
3. Make sure there is money in your bills accounts for bills before any direct debit is due. It can be very frustrating to miss a bill that you had the money for but it was just waiting in another account. Reduce the likelihood of this by funding your different accounts by standing orders or transfers on payday;
4. Some accounting systems that are specifically for piggy banking come with a fee. If your budget is already tight, paying to keep track might feel counter-intuitive.  Look at your free options before deciding to spend money each month on this.

Sounds complicated?

It’s 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. And it isn’t a lot of work to move the money around.

If you would like a lot of the work automated though, have a look at Squirrel, an app that does much the same as piggy banking but moves the money for you. See my review of Squirrel for details.

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