What Is Envelope Budgeting?
I had heard the term used frequently but I never really understood what the whole envelope budgeting process was or why it was successful. In fact, I actually thought envelope budgeting meant that you were loosely tracking your spending on the back of envelopes or something like that (I was totally wrong). The general idea is that you plan how much you will spend that month for each category, tracked by an envelope, and then put that much money into the envelope - forcing you to be diligent because what’s in there at the start is all that you’re allowed to spend.
The reason why it works is because it makes people plan up front instead of winging it each month and because it restricts how much you can spend from both an individual category perspective (one envelope) and a total expenditure perspective (all the envelopes). When an envelope runs out, you can only pull funds from another envelope and not from your savings, hence the limited total expenditure each month. Another plus is the simplicity of the system and how little tracking of expenditures you really need to do since you’re spending from a bucket, you only track the total spend and you don’t have to track individual charges. Finally, anything left over is funneled off into savings.
Envelope budgeting is weak in the sense that budgeting is made harder because you have less information. So you know you spent $500 on food last month, where can you cut back? Since you don’t track your spending, by default anyway, you don’t know how much was spent on groceries and how much was spent on restaurants. While you might remember, more robust budgeting methods will give you this information.
Lastly, remember that any strategy you take for anything is subject to tailoring based on your own experience. If you think envelope budgeting is too simple, add your own twist to it to capture the information you need. Personally, if I used envelope budgeting I’d add the tracking of individual expenditures on the envelope itself so I had a better idea of what was happening.
Update: According to the comments, if you’re looking for an online version of this envelope budgeting system, Mvelopes offers this type of service (and they have a 30 day trial).
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There are 9 comments, add your thoughts now!
I’ve tried the envelope system, and for simple things it’s ok. But there always seemed to be circumstances that came up that required someone to flip out the CC to pay. (Music lesson payments that were forgotten, needed more gas for the car, unexpected school supplies needed). It was little things, but it disrupted the system for us so badly we dropped it in favor of a ‘general’ budget and pay off the card each month. It’s not perfect, but it fit our situation better.
This is what http://www.mvelopes.com does.
You can track your expenses in as detailed fashion as you want: just customize you envelopes in any hierarchy that you wish.
It’s also a good tool for tracking your net worth.
I thought I’d like the envelope budgeting system, but I didn’t for basically the same reasons why you don’t like it, Jim. I wanted to try the envelope budgeting because I was trying to save up for certain items over a few months and I wanted to see my progress. I wanted to put money in every month and have the balance roll over.
It ended up being more of a hassle than it was worth.
Now I just set up a “loose” budget and keep track of spending categories in Quicken. A monthly deposit of fun money goes into a separate savings account earmarked for a vacation or larger purchase (over $100). It’s kind of like an emergency fund for my wanderlust or gadgetlust.
Plus, mvelopes scares me. You have to give them your account info for ALL of your accounts. I’m sure they’re very careful with that information, it’s just not my bag.
You could always track your spending by just putting your receipts into the envelope from which the cash came.
Let me second the http://www.mvelopes.com recommendation.
It counters all the negatives you noted, leaving you with some of the easiest and most detailed expense tracking systems you’ll ever find.
I hated using quicken, MS Money, and other online based systems, because they required so much work on my part. But the Mvelopes system makes everything so painless and fast I was in love instantly.
Try their free trial and see if you don’t fall in love as well.
I used to do envelope budgeting when I was newly married, with one baby and living off just one salary, while my husband was in med school. It worked for me and helped me manage our meager income. Ithink I should go back to it again.
Another idea I got from another forum was to have an ING Direct account with multiple savings accounts, such as one for my cell phone bill, one for my utility bill, etc. This seems like a decent method, plus you get interest while you set aside the needed funds.
I have been using this little application for a little over 3 months now and it has worked fine for me:
http://www.snowmintcs.com/products/budgetwin/index.php
It is based on the budget system and keeps track of individual spending per envelope. It’s also only $30 (I don’t work for them or make any commissions, real user comment).
In response to Trent’s comment about his budget breaking because of unplanned (non-emergency) expenditures, I recommend allocating a “Cushion Envelope” each month to take care of those. With time you may see a pattern in your “unplanned” expenses by looking at the history of your Cushion Envelope and adjust your budget accordingly, maybe you’ll need to plan for a few extra envelopes
I’ve used many different methods of managing my personal finances and agree that there are some great products out there. As a prior Quicken user for over 9 years, I have a tremendous respect for the program and everything it can do. But sometimes, less is more. The benefit of envelope budgeting, if it is used effectively, is that you can see exactly how much money you have in each account as well as in each “envelope” in your budget. The practical management side to using it effectively is having the discipline to contain spending within the envelope limits. As far as programs go, if you aren’t yet comfortable with managing your money totally online or don’t want to pay a monthly fee, you might want to try a new envelope budgeting program, CommonCents 2007. It can be downloaded from http://www.CommonCentsSoftware.com.
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