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Setup envelope budgeting system
Setup envelope budgeting system

When you're ready to take your budgeting to a new level, try this!

Iliya Yordanov avatar
Written by Iliya Yordanov
Updated over a week ago

One of MoneyWiz super powers is its flexibility. We work really hard to make our features allow for a wide range of uses, systems and solutions instead of enforcing a single way of finance management. Of course, sometimes you might need a guidance on how to achieve something and this guide aims to suggest powerful and advanced envelope-budgeting system. An alternative budgeting system would be basic budgeting approach explained in more detail here.

Let's begin with the basics:

What are envelopes?

Forget for a moment that online banking exists and we're back to dealing with cash payments only. Imagine that when you're paid for your work, your employer hands you an envelope with money inside. You come back home, open that envelope and put some money into an envelope labelled "Food", some money into an envelope labelled "Entertainment", some into "House", some into "Misc" and some into "Moon trip" to save for flying to the moon later that year. You discard the "Salary" envelope (of course, by properly recycling it!) and put the "Food", "Entertainment", "House" and "Misc" envelopes into your pocket. The "Moon trip" envelope waits to be filled with more money under your mattress.

You leave the house and decide to buy some groceries. At the checkout you take out the "Food" envelope and pay for the groceries using this money only. If you put too much in your basket, you can borrow from other envelopes.

Later you might decide to go see a movie so you take out the "Entertainment" envelope and pay for the ticket. Wait -- you took out some money from this envelope to pay for the food you've bought earlier and now there's not enough money in this envelope to pay for the ticket. You can't borrow from "House" envelope because it's carefully calculated to pay all your bills. Well, no movie for you today.

You bring another "Salary" envelope next month. Any surplus that remained in your envelopes helps you for this month. You decided that not being able to watch a movie last month was not fun so this month you'll assign less money to "Moon trip" and more into "Entertainment". Other envelopes receive the same amount of money, especially "House" because you carefully calculated it to cover all bills and rent.

Few months later...

The day you've waited for finally arrived! You've saved enough money to go to the Moon! This time when leaving home you only take two envelopes with you: "Misc" and "Moon trip". You leave "Food" and other envelopes at home because they probably don't have "Whole Foods" at the International Space Station anyway.

You arrive to the space travel agent office, take money out of the "Moon trip" envelope and put it into the "Misc" envelope then use the money from "Misc" envelope to pay for your ticket, ignoring the weird stare from the kiosk agent. After all, rules are rules.

Anxiously waiting for them to hand you the space suit, you properly recycle the "Moon trip" envelope.

How is the above different from simple budgeting system?

Simple budgeting system explained here is quite similar but with envelope budgeting you follow the rules about money spending more rigorously and the budget's don't automatically replenish each month with new money -- you have to manually move money between envelopes each month. This puts you more in control and makes it easier to introduce small changes on the fly.

Okay, how do I get started?

The following is a suggestion that you can freely modify:

  1. Create a "Salary" income budget. It should have 0 amount assigned. For categories, select all categories where you get paid (usually all income categories). For start date select the date when you'd like to begin and for end date put a date 100 years in the future -- this way, the budget will remain active at all times. Don't enable repeat.

  2. Create another "Savings" income budget with the same settings as above. The only difference here is that you should set the budget to require "savings" tag (or similar). It's important that you select a tag that no transactions will have -- this way this budget will not see any income transactions and will only rely on transfers from other budgets.

  3. Create expense budgets for envelopes that we mentioned earlier: "Food", "Entertainment", "House". Each budget should have 0 budgeted amount to begin with and monitor categories related to the envelope. If you get paid monthly, you probably want to set first day of the month as the start date. Leave repeat option enabled and also enable rollover so any time you under- or over-spend your budget, the next budget period will reflect this.

  4. If you have any specific goals you'd like to save for, create an income budget. Choose the same settings as for "Savings" budget but with one additional change: set the end date as the deadline for saving.

Once you have the basic setup done as outlined above, wait until MoneyWiz picks up your salary in the "Salary" budget. You should see your "Saved" amount increase (learn more about budget presentation here) -- that's how much money is in the salary envelope. Use budget transfers to redistribute this money to other envelopes and continue using MoneyWiz. Your expense budgets will populate automatically with the transactions you make. Remember: in MoneyWiz you don't create separate transactions for budgets. The transactions you see in budgets are the same ones you see in your accounts. If the transaction you expected to see doesn't appear in the budget, see this guide.

Your goals are following:

  • keep the "Salary" envelope at 0 amount saved (always re-distribute it to other envelopes),

  • don't let the remaining amount of any expense budgets go under 0. If you're close to overspending your budget, transfer money from other envelopes,

  • once your income budget for a particular goal reaches 0 remaining (you've saved 100% of planned allowance), transfer the money to a relevant expense budget to spend the money. Do not delete the completed goal -- instead, archive it by creating a budget group.

That's it! You're now a master of budgeting -- envelope-budgeting style!

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