The Single-Envelope Budgeting Method

Save Money and Reduce Confusion with the Single-Envelope Strategy


Frustrated by the traditional budgeting method? Looking for an easier alternative?

Try this new one: the single-envelope budgeting method.

Before I explain it, let me give some background:

Traditional Budgeting

The most traditional budgeting strategy is to line-item every type of purchase that you make. At the start of each month, you write out your expected "budget" (the amount you hope to spend) on categories like groceries, gasoline, electricity, childcare, cable, magazine subscriptions, Netflix, your mortgage, insurance, and "fun" expenses like clothes, restaurants and concerts.

Throughout the month, you save your receipts on all your purchases (or make an entry in a notebook to track your spending). At the end of each month, you compare your "actual" spending to your "expected" spending. Based on your numbers, you can create a more-accurate budget for the following month. (These budgeting worksheets will help you follow this budgeting method).

The Envelope Budget

However, some people object that this traditional method requires too much tracking. They want to automate their budgeting as much as possible.

People also object that this traditional budget gives them the opportunity to overspend (without catching their error until the end of the month). They want to create a budgeting strategy that doesn't allow them to spend beyond their means.

The solution? The envelope budget. This method requires people to put money in envelopes at the beginning of each week. Every envelope is marked for a certain type of expense, like groceries, gas, or fast-food.

People can ONLY spend the amount of money that's in each envelope. Once the money is gone, it's gone.

This method is similar to a child spending their allowance each week. It's a good strategy, particularly if your goal is to avoid accidentally overspending.

The Single Envelope Method

But the multi-envelope strategy has one weakness: it requires you to estimate the amount you'll spend in every single category.

What happens if you run out of money for groceries, but you still have a bunch of unspent money in your "restaurants" envelope? What happens if you run out of money for gasoline, but your "clothing" envelope is still full? And what do you do when you need to spend money in a category that you haven't anticipated, like veterinarian fees?

The alternative is the "single envelope" method. Each week, tally up the total amount that you think you'll spend on everything. Put all that money in one single envelope. Then only spend the money inside that envelope.

The benefit is that you don't need to worry about where that money is going. As long as your spending is limited to the amount inside the envelope, you'll be fine.

Important Note

There's one final important thing to note, though: you'll be faced with plenty of irregular expenses. Your dishwasher will break. Your dog will need expensive veterinary treatment. You'll need to get your wisdom teeth pulled out, buy a new washer and dryer, and pay for your child's 8th-grade class trip to Washington D.C.

This isn't money that's going into your weekly envelope. But this IS extra money you'll need to set aside each month. I recommend putting this money into a separate savings account that's earmarked specifically for these types of irregular, big-ticket spending items.

This article explains why you should set up sub-savings accounts, and this article reviews SmartyPig, an online savings account that can help you put money aside for specific goals.

Beyond that, you'll need to save money each month for retirement, your child's college education, future medical expenses, buying your next car in cash, and other long-term endeavors.

Anything left over "after" these savings goals are tended to is money that can get spent on vacations, new barbeque grills and other luxuries!