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THE ENVELOPE BUDGET
The Easiest Budgeting Tool I Know
By David Dopp
My son, who has always had a problem keeping track of his money, had tried just about every
budgeting trick he had ever read. Despite his efforts, every budget failed him because of the
bookkeeping he had no time to do. He often wound up eating Top Ramen noodles for a few days
before every payday … and he hates Ramen noodles!
Knowing that “Ole’ Dad” had years of experience in financial planning and budgeting, he asked
me to design a simple but effective budget method that didn’t demand a whole lot of time to
maintain. (He had a pretty active social life, which is probably why he couldn’t keep track of his
money!)
Now this was a challenge! I know exactly how to manage the finances of a large corporation,
but Eric could not afford to hire half a dozen accountants to keep track of his money. Reaching
way back to my college days, I remembered a course I took called “Governmental Accounting.”
Governments account for money differently from you and me.
Governments use a process called Fund Accounting. Every major budget item is a “Fund” and
governments allocate their budgets according to those funds. Fund accounting can become
pretty complex, mainly because of the “smoke and mirrors” that often accompany government,
but this idea had possibilities!
If I think of Eric (or a family) as a small government, why not set up some basic funds and use
that as the basis for a simple budget? There should be a minimum number of fund categories,
say Operating Fund (Living Expenses), Debt Service (Credit Cards, Vehicle Debt, Etc.), Capital
Fund (Housing) and Reserves (Savings).
OK, we have the funds. Eric is not a government, so he can’t raise taxes. He does however have
an income. (“Not enough, Dad, not enough!”) The big question now is how to divide his
income into the fund categories. Oh yeah, and make it so easy he doesn’t have to think about it!
Part of Eric’s problem is he needs to spend money every week, but he only gets paid twice a
month. It was also a stretch trying to pay the rent, car payment, credit cards, etc. (Plus these
items were not all due on the same day!) He had enough cash coming in during the month.
What Eric faced every month was a cash flow crisis, usually half way between paydays. To get a
handle on his money problems, we had to first determine his monthly costs.
It took us about two hours one day to sit down and fix his money problems. We determined that
he needed money to cover his weekly living expenses (groceries, gas, laundry and entertainment
or partying, as he said.)
Next he had to cover his monthly debts and rent. He also needed to cover routine vehicle costs
(oil change, tire replacement, license plates, insurance) and he needed a savings amount for
emergencies.