budgeting with categories

Budgeting with (Digital) “Envelopes”

I’ve been posting lately about budgeting with the YNAB budgeting software. As you can tell from the multiple posts, I am a big fan (note however that these posts are my own opinions and SET Financial is not endorsing or recommending any software or ideas presented here, just to be clear).

I am going to continue in that YNAB story line today but focusing on their cornerstone idea of ‘giving every dollar a job‘. That concept is like, in my opinion, using software or a computer program to put money in the old fashioned envelopes that you keep in a drawer as a way to manage your bills. Remember anyone doing that? My wife used to do that before we got married! She used to put part of her paycheck, literally, into an envelope twice a month. Then when the mortgage bill came, she pulled out that envelope and paid the bill.

budget using envelopes

That idea is what I am talking about here but let’s use a computer instead of envelopes!

 Here is how the process works:

  1. Give all your money you have in hand or in your checking account ‘jobs.’ Think of a ‘job’ as an envelope or category of spending
    • Every time you get paid put that money into spending ‘buckets’ or categories (envelopes).
    • For example, if you just got paid $1,500 and you don’t get paid for another two weeks, assign money to those
      necessary bills and everyday expenses:

      • electric bill (due in one week): $150
      • groceries: $350
      • gas: $100
      • auto insurance (due in one week):$200
      • restaurants: $100
      • medical/drug copays: $25
      • spending money/cash: $75
  2. You note that you have assigned $1,000. You have $500 left over without a job.
  3. That means you have $500 left over without a ‘job’.
  4. Assign that remaining money to ‘rainy day’ or ‘savings goals’ like:
    • car repair: $100
    • new curtains: $100
    • emergency fund: $300
  5. Now you see that all the money you have in hand has a ‘job’.

Now when those expenses come up over the next few weeks, just go ahead and spend as you have assigned. Take money from those buckets or envelopes and spend as you outlined.

Now when you get paid again in two weeks you fill up those buckets again like you did before. Over time, the goal is to accumulate more and more reserves in your rainy day and savings goal buckets. In our family, we are trying to use this process to grow our rainy day and emergency ‘envelopes’ or categories to be able to, as the YNAB folks say, ‘live on last month’s income. That’s when you know you are becoming a budgeting rockstar!

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