A year of envelope budgeting

It’s time to declare victory over budgeting. Or more truthfully, victory through budgeting. Over the last decade or so my wife and I took a few runs at setting up and sticking to a family budget, but they all faltered. This past year we succeeded.

What worked this year? It was all about the envelopes … and the will to use them.

Previously we’d run the reports, figured out our budget, and logged expenses, but the fudge factor was killing us. Sure, my coffee budget was $40 a month … but damn, I really need to meet with Erwin to talk about this project at the Cosmic Cup … “ding” $5 added to expenses. Yeah, I reached my lunch budget for the month but the guys are going out to Porter’s to talk web analytics … it’d be weird if I said no. The same pattern played out with household purchases too as we talked ourselves into buying things we needed for the house (and most of the time, we really did need those things).

There were a lot of budgetary rationalizations — and I’ll freely admit I made many of them — and they were slicing our budget to bits.

In the run-up to the 2015-16 budget, we wrestled with how to do this better and yeah, it got contentious at times. Never about what we should spend the money on — that was clear from the budget — but the actual mechanics of how to keep track of what we had, what we’d spent, and what we were going to spend caused some heated discussions.

Enter Envelope Budgeting

We settled on an envelope budgeting system. The envelope system involves taking your budget, breaking it up into categories, and then setting up envelopes — real or virtual — for that money. Money that goes into an envelope stays in that envelope until you spend it. One of the best parts of the system is that we did this for our entire budget, including the big-ticket purchases and contingency funds. We often found that we were getting hammered by a series of unfortunate financial events: we’d spend a bunch of money on the kids for clothes at the start of the school year, then get hammered by a $500-$600 car repair, followed by one of our big tax bills.

These events would disrupt that month’s budget, causing us to use credit cards as a stop-gap. We would then pay down the credit cards, but when we got to zero the next series of unfortunate events would happen. We never carried a huge balance on our credit cards, but it wasn’t uncommon for there to be $1,500-$3,000 floating out there on two or three cards.

With envelope budgeting, we plan for those contingencies … and we stick to the plan. “Clothing” is a category that accounts for all of our family clothing expenses. We don’t typically spend the entire category each month but we do keep funding it each month, and the amount in that virtual envelope rolls over each month. The accumulation of cash in the envelope means that we can more easily accommodate our start-of-school shopping binge. The same is true for contingency funds — we now have a “Car Repair” virtual envelope that we put money aside into each month and then defend that money vigorously.

Sometimes categories go over in a month. If they do, we adjust other categories to address the shortfall. Sometimes we’ll let an overdraft on a category ride, knowing that we aren’t spending anything in that category the following month, but it’s better to balance the budget.

Tracking the Envelopes

Most of the envelopes are virtual, tracked in Quicken, and a supplementary spreadsheet. A few are literal envelopes with real cash in them. These real-world envelopes are typically used for problem categories, the ones that we traditionally overspent on. Having the cash on hand creates a physical reminder of how much money we have left for the month; once the money is gone, it’s gone … no rationalizations about how to add more to the envelope. This was great for my dining, entertainment, and comic book budgets. I always seemed to be able to talk myself into adding another comic to my pull each month, causing that line item to balloon. Now I have the cash on hand when I get to the comic bookshop … and that’s it.

Saying “No”

The most difficult part of setting up the envelope budget — aside from the pain of realizing how often we’d been going over the baseline budget in the previous year — was agreeing on categories. You’d think this would be straightforward, but we had a lot of debates over whether buying chocolate from a school fundraiser for Easter counted as “Gifts: Easter”, “School”, or “Fundraising”. In the end, we decided the category wasn’t that important; what was important was that the expense had been accounted for in one of them … and that the expense matched up with that category.

Personally, the hardest part of executing the budget was saying “no” to my friends and co-workers. No to that extra lunch, no to grabbing a beer after work, no to going to that Phantoms ice hockey game. It’s not that I don’t have any money to spend on these things, but I certainly have less than what I’d need to say “yes” to all those requests. Explaining that we had a budget — and were sticking to it — made saying “no” easier, but it’s still awkward.

Preemptive Saving

Aside from saying “no” more, another other strategy that worked for us was using our unallocated savings (e.g. the generic savings we’d put aside before, our annual tax refund) to pay down our credit cards and to prime certain troublesome categories (clothing, auto repair, taxes) by adding money to them before their corresponding expenses hit. Even having a hundred dollars extra in one of those categories helped; it allowed us to absorb a small hit or two while continuing to save for that category.

Finally, it was a team effort. In the early days of the budget, we met once a week to see where our expenses were — where we were coming up sort, where we needed to balance things out, etc. Those meetings are less frequent now, but they were essential to getting us on the same page.

We weren’t in a bad place, financially, before the budget. Nor were we on the brink of bankruptcy or drowning in debt. We kept up with our expenses, but there were tense (financially and emotionally) months when all of our expenses seemed to conspire against us to inflate our credit card debt.

Victory through Envelope Budgeting

Now we’re in a much better place. We pay off our credit cards each month, and we’re now paying the current balance — not last month’s statement balance, but the live balance — because hey, we already allocated that money. We spent the money; paying the credit card simply means we can’t spend the money again.

The budget allowed us to absorb a pretty substantial car repair bill over the summer, just a few days before we went on vacation. Normally that would have been a source of stress, but this year, well we’d been saving for that eventually. It’s reigned in a lot of the overspending we (or at least I) used to do.

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