Why do people have trouble starting and using a budget? I think it starts with two words – Forecasting and Rigidity. Think about how you probably budget (if you budget). Maybe you take a piece of paper (or a spreadsheet, or Mint. It doesn’t matter the tool, just the method) and write something like this
This months income: $3000
This months expenses:
- Groceries: $300
- Rent: $1000
- Utilities: $40
- Entertainment: $100
- Total: 2400
The first problem with budgeting like that is you are forecasting your income. In other words you wrote down money you don’t have, so you are starting the whole operation with a guess! Even if you have a reliable government job, you’re working with dollars that don’t yet belong to you. And that means that your budget is already starting off as a sort of theoretical document. What if instead you budgeted for all of your expenses using the money you already have? That shifts the conversation to something concrete. If I currently have $4000 in my bank accounts, then I can allocate that money to my expenses, and I know that right now, today, I could pay all of those bills and expenses.
Budgeting in the traditional way also is very rigid. At the end of the month how often did you actually hit those estimates for your expenses? I know I usually managed to blow at least one or two of them out of the water, which makes the whole rest of the budget suspect. If I overspent, where does that money come from? Do I take it from next month? I know that didn’t work, because I never would adjust my next months budget downward to compensate for it, if I even made it to a second month.
Before envelope budgeting, I would make a budget in a flurry of optimism, then by the middle of the month, I’d already have abandoned it. It was too theoretical and too rigid, and it made me feel bad that my life didn’t march to the perfect beat of my budget’s drum, rather then my budget flexing with my vibrant, dynamic life and changing priorities. And so I would just… give up.
How does envelope budgeting work?
Envelope budgeting asks you to gather all the money you have right now. Then you take a pile of envelopes and label them with of all your bills, obligations, and nice-to-haves. Then you put money into each envelope, as much as you think you will need for that category until the next time you get more money. When you run out of money, you’re done budgeting. This method is also called “Zero-sum budgeting,” which means you budget every dollar you have, until you have zero money left to assign to an envelope.
When you then go to the grocery store, you would just grab your groceries envelope and take it with you. Whatever money you have in the envelope is the maximum you can spend. You still have to think ahead (“How many grocery trips do I need to take before the next time I get more money?”), but it keeps you from accidentally spending, say, your utility money on groceries, and vice versa.
Living in the now, and flexibility
So how does this method solve the forecasting and rigidity problems? Well, we aren’t forecasting, because we are only using money we currently have to plan our budget. And the flexibility comes in from the simplicity of the system. Lets say your brother calls you, and says he would like to stop by for dinner tomorrow night. You want to cook him a nice dinner, so you make a list of ingredients you will need to buy at the store. You estimate you’ll need $25 more than you’ve budgeted for groceries. What should you do? Maybe you would normally put it on a credit card, and promise yourself you’ll sort it out later. But since you’re working with envelopes and only the money you have right now, you decide to take the $25 out of your entertainment envelope. There, now you don’t have to remember that you need to scrimp a bit, it will be obvious, because your entertainment envelope has less money in it! Easy peasy, no shame, and no slowly and sneakily putting yourself into debt.
Doesn’t it sound like a lot of work!?
Well, yes it does. Envelope budgeting as a method was invented a while back, so using envelopes with cash was the easiest way to keep track. But now, most people use debit (or credit) cards for most of their transactions, so how can we implement the method in the modern world?
I have found one program that implements envelope budgeting very well – You Need A Budget (YNAB). It is an amazing program that is online, and has a mobile app, so when you are at the grocery store, you can pop open the app to see how much you have allocated to your groceries category (analogous to the envelope). They have a 34 day trial, and I highly encourage you to try it out. Their online tutorials and classes are amazing, and their support is top-notch, too.
Projecting and planning
Another thing people ask me is, “Well, if we’re not supposed to forecast, how are we supposed to plan for the future?” When I use the word “forecasting,” I just mean planning our month using money we haven’t yet received. We can plan by using categories for our goals. Just like you will have a Groceries category, you can have savings categories, like New Car or Emergency Fund. As you get money in, you can chose to add money to those categories. They will get bigger and bigger until you reach your goal, then you can spend it for its purpose, or, if like your Emergency Fund its purpose is to sit there an act as a cushion, that’s fine, too. You don’t have to spend it, just like you don’t have to spend the money you have in an envelope.
I’ve skipped over a few other issues I have with traditional budgeting. For example, we tend to be far too optimistic about our expenses. But for now, this gets you started on a whole new way of thinking about your budget. Remember, you don’t need to feel bad if your life isn’t fitting your budget. Your budget is supposed to be flexible enough to change with your life, instead of making you feel bad for your priorities changing over time.