Thursday, July 16, 2009

What's Envelope Budgeting?

Someone was asking me recently what I thought of, and I said that I wished it supported envelope budgeting. "What's envelope budgeting?", she asked. I've mentioned it here on a few occasions -- here's what I wrote to her:

In a nutshell, envelope budgeting means that you have cash on hand before spending money. In the old days you would cash your paycheck into actual cash, and then divvy up the cash into envelopes marked "rent" or "gas" or "clothes" or what have you. When it came time to buy something or pay a bill, you could only spend the money that you had in that envelope. There's nothing keeping you from moving money from one envelope to another, but the assumption is that you're wise and you're not going to take all of the money out of "rent" to go buy stuff.

Obviously we don't use cash and envelopes anymore, but the theory is still there. A financial management system that supports envelope budgeting wouldn't show you what your checking account balance is as much as how much money you've got in your set of virtual envelopes.

This is different than what Quicken or or a bunch of other financial management tools do. Sure, Quicken lets you categorize your expenses, but it's more forensic accounting ("where did my money go?") than a planning/saving tool. The power of envelope budgeting is that you're giving each dollar a name and a purpose, putting you in control of your money. Envelope budgeting is also much better than traditional budgets for more occasional expenses (property taxes, car repairs). I know I've got to pay property taxes in October, and I'm putting a little money in that envelope now with each paycheck, so that when that big bill comes along, I'm all set. It also works very well for those with irregular incomes -- you can prioritize your expenses, funding the most important envelopes first.

There are a variety of online services and dedicated programs that support the envelope method. I tried out a while back, but it's expensive and they want to know your banking login information, which I'm a little creeped out about.

I'm taking a look at now -- look for a post in the next week or so.


a none e moss said...

"envelope budgeting" is too simplistic. What if you don't have the cash yet, but you will pay the groceries with a creda it card until your next paycheck comes in?
Budgeting is not really about knowing what to do with the residual cash.

Jonathan said...

Envelope budgeting has been the best technique I've ever seen for keeping a budget balanced in real life. It's easy to write a budget on paper, but unless you follow through with it, it's not worth the paper it's written on. Envelope budgeting helps my wife and I make it happen every day. And we've never been surprised at the end of the month once we started using it.

The easiest way I know of to blow a budget is to use an ATM, debit, or credit card. Unless you are really careful, it's too easy to spend more than you intended, IMHO.

If you want to know more about envelope budgeting, check out Dave Ramsey's book "Financial Peace." (I'm not in anyway connected with him. Just an appreciative reader.)

Anonymous said...

I came across your blog and the envelope budgeting idea only just tonight. I spent the last few days "inventing" envelope budgeting in my head -- I didn't know it already existed -- and I was searching for information about Quicken for Mac 2009 (10). Neat to know this exists.

What I'm using for envelopes in my case is gift cards. I have Paypal with debit card accounts for spending money, and then a gift card for groceries, another for gas, etc. Then I'm entering a full month into QFM2k7 ahead of time. Inelegant, but serviceable for now.

mdnttech said...

You should check out Envelopes for iPhone

Funny about Money said...

It's pretty easy to do envelope budgeting in Excel.

@ none e moss: If I spend next month's grocery money at the Safeway today, then next month I won't have enough to buy next month's groceries.

Thus I will always be in the hole.

Interestingly, that hole seems to magically dig itself deeper and deeper. After a year of these shenanigans, I'll find myself in a hole that I can never climb out of.