My approach to budgeting: the electronic envelope system

In our house, I am the Keeper of the Budget.  In the beginning, we opted for a simple yet vague “spend less than you earn” approach.  As our bills became more complex, I moved our finances to a spreadsheet system.  We’re sort of middle middle class, neither lower nor upper: we have more than enough money in the bank to cover bills at any given time, but lack complicated income streams from investments and such.  The system we use works really well for us, and I’d like to share it with you today.

The Electronic Envelope System

One of the simplest forms of budgets is something called the envelope system.  At the beginning of the month, you take out the cash you plan to spend, and put it into physical envelopes for each category of expenses.  You might have an envelope marked “Groceries,” for instance, and another labelled “Movie Tickets.”  Throughout the month, you spend what’s in the envelope; when it’s gone, it’s gone.  If there’s money left in an envelope at the end of the month, you can carry it over for the next month or stash it away as extra savings.

That, in a nutshell, is how my budget works.  Except there are no literal envelopes involved.  My “envelopes” exist as columns in a Microsoft Excel spreadsheet, while all the money stays mingled in our checking accounts.  Every dollar is allocated to a specific future bill or group of expenses.  When we use up all the “Eating Out” money in a given month, it’s done—even if there’s plenty more money in the bank, there’s no money left in that “envelope.”  (OK, I do move money around in the spreadsheet sometimes.  Flexibility is a benefit of the electronic approach.)  Money left in an “envelope” at the end of the month carries over to the next month, so if, say, we don’t eat out much in March, we can go out a few extra times in April.

Categories of Expenses

To keep things organized, there are five groups of “envelopes” in our budget:

  1. Regular Monthly Bills.  These are bills that come due every month, and that are either the same amount of money each month or something fairly predictable.  Examples: rent, electricity, car payment, health insurance.
  2. Regular Non-Monthly Bills.  Bills that are predictable, but that don’t get paid every months.  For instance, I pay $400 every summer for my yearly campus parking permit.  Thus every month I put $400/12=$33.34 in the “Parking” “envelope.”  (In practice I round it up to $35, just in case the price goes up next year.)  Other examples: car registration, trash pickup (billed every 3 months here).
  3. Stuff We Buy Every Month.  This covers things I know we’ll pay for every month, although they won’t always add up to be exactly the same.  Examples: groceries, toiletry products, gas for the car.
  4. Stuff We Pay For Occasionally.  This covers all other groups of expenses, things that might cost a lot or a little in any given month.  Like furniture, or office supplies, or vet visits for our cat.  There’s also a “Miscellaneous” category for me and my husband that acts as our monthly “whatever you want to do” allowance.  Other examples: health care, clothes, gifts, toys for Little Boy.
  5. Savings.  No budget would be complete without savings.  This includes money that gets moved to our savings account, and money put into our retirement funds.

The Spreadsheet

Because I’m not physically taking cash out of an envelope, I need another way to keep track of how much money has been spent in each category.  That’s where the spreadsheet comes in.  Each “envelope”/expense category is one column, with a row for every day of the month.  Something gets spent that day, I enter it into the appropriate cell in the spreadsheet.  It does the rest of the math for me.

This might sound like a lot of work, but it really only amounts to an hour or so every two weeks.  I keep all our receipts, and check them against our bank accounts as I enter the numbers.  This method has the added bonus of quickly alerting me to any suspicious transactions on our accounts.

Since showing is better than telling, I’ve created a version of my spreadsheet on Google Docs, linked below.  The numbers are all fake, but the basic set-up is the same.  Notice the difference between “Savings” and “Net Cash”—there are dollars left in our bank accounts at the end of the month that are not savings, but monies allocated to specific budget “envelopes.”

We’ve saved a lot of money this way, enough that we were able to put a solid payment down on a new car last fall.  In a few years, we’ll have enough saved for a nice down payment on a house.  Interestingly, I’ve also found this approach frees me up to spend a little more on myself: when I know that there’s a certain amount of money available, I’m more comfortable spending it than when I was just trying to spend less than I earned.

Any questions?  How do you approach budgeting?

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