What is Envelope Budgeting?
Envelope budgeting is traditionally a cash based system. There have been some well known radio and TV personalities that refer to the system as the type that your grandparents probably used. Meaning that it is a common sense approach to budgeting. The premise is simple; Each time you get your paycheck you divide the cash into different envelopes. Each envelope representing a different expense. Then, as the need arises, you remove the cash from the appropriate envelope to pay the expense and replace the cash with the receipt for that transaction.
Envelope budgeting certainly has its advantages. One of the biggest advantages is that if you strictly adhere to this system then it is virtually impossible to go over your budget. You are pro-actively deciding where your money is going and giving each dollar a name. This however, as in all budgets, requires discipline. If you have set aside $50 in your dining out envelope for example, then when that $50 is spent you cannot give in to the temptation to steal from one of your other envelopes.
Many people have also found this system to be a good way to plan for long term expenses. A great example of this is saving for big ticket items such as a new washer/dryer, new tires for the car or that Disney vacation you’ve been wanting to take. Each of these items would be their own envelope that you would dedicate a portion of each paycheck to filling. You know that the car is about a year away from needing tires and you estimate that the tires will be about $400. That means that each month you need to sock away $33. If you get paid twice a month then you only need to put away about $17 a paycheck. Then a year from now when you’re slipping and sliding all over the road with bald tires, you can walk into the tire shop and pay cash because you properly budgeted for them.
The problem with traditional Envelope budgeting is that it falls apart when you start using your debit card for transactions. Personally, I hardly ever carry more than $10 in cash. My debit card gets used for almost every transaction and all of my bills are paid via my banks online bill pay system. That throws a little bit of a monkey wrench into the system described above.
That is where Personal Finance Software comes in to save the day. There are a myriad of personal finance software applications on the market today. However, most of them work like a traditional check register. You enter your transactions into the register and the software automatically keeps track of your running balance. There are however several software options for the envelope budgeter. They can be divided into two broad categories. Web applications and traditional desktop based applications.
Two of the biggest players in the online web application market are Mint and Mvelopes. Both of these applications exist entirely online and have many of the same features. For example, both of the applications will connect automatically to your bank and pull in your transactions for you. The theory here is that you won’t have to manually enter each of your transactions for every purchase. One major drawback for both of these applications is that you are trusting your highly sensitive online bank access to a third party. To their defense, each have taken steps ensure that your data is safe and that your username and password won’t be compromised. However, for me, I only need to look at some of the high profile data breaches that have happened in the last year to know that I don’t trust anyone with my data online.
The second category is that of the traditional desktop application. That’s where Money Folders comes into the picture. Money Folders overcomes all the challenges of integrating the traditionally cash based Envelope budgeting system into todays increasingly cashless society. It does this by allowing you to setup “Income Sources”. You define where each and every dollar goes before you get paid. Then when you do get that paycheck, you simply click one button to have those funds divided out into the appropriate envelopes.
Let’s say for example, that you have a monthly mortgage payment of $1,000.00 (It’s a nice round number) and that you get paid twice a month. You could setup your Income Sources in Money Folders to deposit $500.00 from your first paycheck and $500.00 from your second paycheck to your Mortgage folder. Then at the end of the month you have that money set aside and waiting for you.
It will take some time to become acclimated to the Envelop style of budgeting; Your budget will change after the first month. Hang with it though, and you will soon have control of your financial future. Pay off debt, save money for a rainy day and live without money worries.
Photo Courtesy of: AMERICAN ASSOCIATION FOR
BUDGET AND PROGRAM ANALYSIS
