Lately I’ve received a lot of inquiries about the envelope budget system, how the envelope system works, and how Excel could possibly help a person use the envelope budget system. I thought it would be worth writing an article about.

First off, let me just explain the envelope budget system in general, we’ll then get into the advantages and disadvantages of the system, and how Excel fits into the scheme of things.

The beginnings of the Envelope Budget System
While studies have shown that even grandparents are on the slippery slope of access to easy money, many of them have had certain values instilled in them throughout their life that have helped them become masters of their money. One of these values was is live within your means. A sure-fire way of living within your means was to use a trusty Envelope Budget System.

Basically, Grandma & Grandpa would receive money from work. They would take this cash and divide it up into different envelopes. The envelope might have been labeled “Groceries”, “Savings”, “Oil”, “Entertainment”, etc. They could have as many envelopes as they desired – although they probably kept it pretty simple. When they went grocery shopping they would bring the “Groceries” envelope, and pay out of the “Groceries” envelope. If there wasn’t any money in that envelope, they wouldn’t buy groceries. If there was any money left over then that was just great! When they were paid again, they would start the process of this simple envelope budget system again, refilling the envelopes.

Well, back in those days people didn’t go into bankruptcy nearly as often, credit cards were non-existent, and money on credit was pretty tough to come by. These days, things have certainly changed, and the American people are busy lining the pockets of the likes of Visa, MasterCard, Citibank, and so on. (Even our grandparents have fallen prey to the slick-talking, sleek-advertising wiles of sexy credit!).

Advantages of the Envelope Budget System
There are many advantages to using an envelope budget system. (1) If you really stick to what your envelope dictates (which was decided upon by you while you were not emotionally tied to that little scarfy thing in the mall you absolutely must suddenly have). If you don’t have money left in “Clothing” then you don’t buy any clothing – period. This is the biggest advantage to the envelope budget system: you are forced to live within your means. Every financial advisor should tote this as the principle of financial success: You must live within your means.

Another advantage to the envelope budget system is its simplicity. You have envelopes. You fill those envelopes with money. You spend money from those envelopes. You don’t spend money from those envelopes if there is no money in the envelopes. Simple? Beautifully.

Disadvantages of the Envelope Budget System
I’ll be the first to say this: the envelope system can get a bit cumbersome for two reasons: (1) You have to divide your paycheck in cash. That means you have to go to the bank and get the right change for each envelope. This is a royal pain if you ask me. Especially if you don’t particularly enjoy going to the bank. (2) You have to remember to take the envelopes with you. My wife and I, while using the YNAB System, could not for the life of us get our grocery expenses to stay within our pre-determined budget. Finally we decided we would force ourselves to stay within budget by using the envelope system. If the cash wasn’t there, we wouldn’t spend the money.

Well, basically what happened is that we would forget to bring our grocery envelope with us when we went grocery shopping. This resulted in us having to whip out our debit card and then go to the dumb bank (see above) to “reimburse” our checking account with money from the grocery envelope. I had to do this multiple times in one month. We bagged the idea.

I considered putting the envelope in the car. My wife thought about putting the envelope in her purse. I didn’t like either of these ideas. If my wife’s purse were stolen we would stand to lose the entire month’s grocery money (instead of just having to cancel the debit card and make a trip to the awful DMV). If our car was stolen I would cry like a girl. Then when I rememered the envelope full of our grocery money for the month, I would cry like a girl again. My wife didn’t want to see that. (And I didn’t want her to see it either).

Excel in the Mix: Improving the Envelope Budget System
Pardon the push for the YNAB System in this next paragraph.

The YNAB system operates using a ‘virtual’ envelope system approach. That being said, basically what you’re getting is a list of categories or ‘envelopes’ that you put money into each month, based on the number YNAB tells you is available (I made it so easy!). When that number has been completely allocated to your ‘envelopes’ in Excel, you’re set to go.

Now, you make all of your purchases with a debit card. I suppose you could even purchase everything with a credit card and get the rewards, but unless you’re not carrying any balance whatsoever on any card, I wouldn’t recommend using cards at all. You still have a few things to master before you get to “fly the friendly skies” for free (is it really?).

So, for the sake of simplicity, you’re making virtually every purchase with your debit card. When you make a purchase, you record it in YNAB and that deducts money from your ‘envelope’. The system is pretty straight-forward. If YNAB tells you you’re out of money in that envelope, then you can’t (*ahem* shouldn’t) spend the money.

Remember, a budget should be simple. So if you’re looking to use 100 categories you’re going overboard. I use a category list suggested as a starting point by Dave Ramsey and have included that in the YNAB system.

Excel does a few things for your envelope budget system: you don’t have to get the exact change for envelopes – be exact down to the penny if you want. You won’t forget your debit card (well, some of you still will, but how can I help that?) like I forgot my envelope, you’re still able to track how much is in each envelope, and you can accumulate excess cash in your envelopes that is easily traceable.

That being said, you don’t need the YNAB system (either YNAB, or YNAB Pro) in particular. You could make your own envelope budget system in Excel.

My grandpa has told me (numerous times) how he could ride the bus downtown, get a burger, fries, and shake, see a movie, and ride the bus back for a quarter. While prices may have changed, the principles of good money management certainly have not. Take a shot at the envelope budget system and see how it works for you.

One of the most difficult aspects of budgeting is with one thing: Variability in your income.

Try a Budget Planner
Excel isn’t necessary to follow this principle, (neither is the very sleek, YNAB Pro). It might make it slightly easier to get the job done, but it can be done on pencil and paper just as well.

To make your own budget planner, (excel, pencil and paper, whatever it takes) you’ll need to know how much money you make. Is that pretty easy for you? Some people are paid on salary and they know exactly how much they will make so this isn’t a problem. Other people (like myself at the moment), are paid hourly. My hours used to fluctuate based on how much I could work between school and family, so I really didn’t know exactly how much I’d bring home each month. Perhaps you work on a purely commission basis – sometimes you bring home a lot of bacon, and sometimes not so much.

So how do you deal with the variability of your income?

Solution #1
I’ve seen plenty of finacial advisors suggest a ‘priority approach’ to your budgeting. Basically what that means is this: At the creation of your budget planner, you would list all of your spending categories in order of importance. The most important five categories might be as follows:

1. Food
2. Mortgage
3. Utilities
4. Cable
5. Insurance

I’m kidding about #4.

As you move through every category you’ll get a feel for what’s a need and what’s a want. Be honest with yourself. Basically when you’re paid you make sure you take care of these top categories first. You prioritize and you stick to it. If you’re paid $1500 every two weeks at a minimum (because your commissions fluctuate) you would want to make sure that you set aside some of your mortgage payment money from the second paycheck so you wouldn’t be left high and dry without any money for your other necessities. You want to even out your cash flow and stick to these priority categories. Your entertainment/vacation categories would come at the end of your list – but if you made a good amount of money one month then you could put a good amount towards your vacation (to be paid for later in cash).

Now keep in mind these priorities. Where people get into problems is they confuse this order. They end up buying a few wants before they’ve really taken care of #1 or #2 up there. All of a sudden your purchasing groceries on a credit card (and not just for the reward points).

If you take a hard look at the Expenses in the YNAB system, I made the default categories in a certain order on purpose: by order of priority. It helps each month to sit down and decide how much you’ll be giving before you decide how much you should spend on vacation. Also, when you allocate how much you’ll pay yourself (in the form of savings) you’ll be surprised there’s plenty left over when you get to the ‘miscellaneous’ category. The order of these categories has really helped me and my wife prioritize where our money goes.

I much prefer Solution #2. I steal a bit from Solution #1 (the priority budgeting I just mentioned) and use a method I’m yet to see anywhere else.

Solution #2
This is where I enjoy the advantages of software. Budget planner’s can have this method built in, to somewhat automate the process, or you can just track it yourself. Excel just makes it easier. And obviously a stand-alone application does as well.

Instead of having to worry about the variability issue of your income, why not just delay spending it? I talk a whole lot about this method here, and specifically about the buffer here.

If you have a great month as a salesman in January, and are paid in February for your January commissions, you’d end up spending that money starting March 1st. Let’s say you make $6,000 of commissions that are paid to you in February. You would simply let that money sit in your checking account. Then, come end of February or beginning of March, you sit down and ask yourself:

“How much did I make the previous month?” This is an easy question.

You made $6,000. You would then budget that $6,000 to be spent in March. What you made in March, you would then spend in April and so on.

So, if you’re really thinking this through, you might be wondering how the heck you could live through February if you didn’t spend any of the money you were paid during that month? That’s where your one-month buffer comes into play.

I insist that you save some money. This method is the ticket to no longer living paycheck to paycheck. But you have to live a little different for a little while – just a little while! It’ll probably take you a few months of hard work – living well below your means – to save up one month’s expenses takes a bit of fortitude, some desire, effort, persistence, sweat, dedication, and maybe a dash of faith.

Once you have that one month buffer you’ll be ready to use this method. If your expenses fluctuate with your income (you spend every penny you make? Shame on you!) then you’ll want to save an average of one month’s expenses.

On a personal note, my wife and I have used this method since we first married. We had some savings between the both of us and decided we would solve the problem of variable income (we were both working hourly at the time) by delaying spending our money for one month. Little did I know how powerful this principle was when we first started. It is really the foundation of our own Excel Budget Planner that we sell here on this site.

When you couple delaying your spending by one month along with prioritizing where your money goes first, as discussed above, you will find there is enough money coming in! 99% of people make enough money – they just don’t manage it!

I encourage you to give this system a try. I don’t mean necessarily that you purchase my system, I simply mean that you should give this principle a try. Save one month’s expenses. Prioritize your spending. Live on less than you earn. Have a good night’s sleep.

Dave Ramsey is a very well-known radio talk show host and best-selling author. He has helped thousands of people through his Financial Peace University seminar. The Financial Peace University seminar outlines 7 Baby steps toward financial peace. I thought it would be fitting to discuss those baby steps here, in light of the YNAB Personal Budget System. Do the two jive?

More than you think. They thrive on each other.

1. Make only minimum payments. Squeeze your budget until you have $1000 cash. This is the start of your emergency fund.
2. Snowball your debts, smallest to largest.
3. Save a full emergency fund of 3-6 months’ expenses. (I recommend ING for this account.)
4. Fully fund 15% of your gross pay into pre-tax retirement plans and a Roth IRA (if you’re eligible).
5. Fund your kids’ college.
6. Pay your home off early.
7. Build wealth, and give it away!

Baby step 1 goes right along with the first rule of cash flow management (see this page). While Dave Ramsey puts out a blanket $1000, I simply advise you to save one month’s expenses. That way, you’re on your way to your emergency fund. However, I don’t suggest you put that money into your emergency fund account. It’s to be left in your checking account. Having that one month buffer allows you to budget and spend money earned in January, in February.

This one month lag creates an optimal situation for budgeting. Financial peace comes when you aren’t caught by surprises. When you’re lagging one month behind your paycheck (instead of your bills!) you will experience financial peace. You then only budget what you know you make – because you already made it.

Baby step 2 makes perfect sense also. The fewer payments you have to make to someone else, the more financial peace you will experience. When your money belongs to you, that is a very, very nice feeling. With a purchase of the YNAB system, I give away a bonus debt snowball tool that makes this snowballing of debts a piece of cake.

Baby step 3 brings you further on up the road to current financial peace. You don’t need to graduate from any university to realize just how great it would feel to have 3-6 months’ expenses sitting in a liquid fund that were there only for emergencies. I can tell you from experience – it’s nice.

Baby step 4 deals with your future financial peace and should not – cannot be ignored until later in life. Seeing your nest egg grow over time will give you more financial peace than just about anything. Keep in mind that you will want to diversify your retirement savings. Don’t put it all in stocks, don’t put it all in bonds, don’t put it all in real estate. Diversity brings even more financial peace. Dave Ramsey hammers this home day in and day out on the radio – you must diversify.

Baby steps 5-7 are all pretty self-explanatory.

I want to emphasize one point here. Dave Ramsey does mention budgeting throughout his books – even though it’s not a baby step. These baby steps are really only possible if you have a solid grasp of your money. You must know where your money came from and where it’s headed. Don’t be deceived into thinking this will be an easy task – reaching baby step 7 where you are building enough wealth that you can give away a ton of it and still live the way you want to live. Reaching that type of lifestyle takes hard, focused work.

Financial peace university is an excellent, excellent education that Dave Ramsey is providing to America. I hope I can also do my part by sharing one aspect of a proven financial peace plan with you. As I like to say, when you take care of cash flow, the baby steps balances take care of themselves.

When beginning a personal budget, Excel worksheets should be considered a viable option. I’ve spent the last several years developing a system of worksheets that make a personal budget simple, easy, and — most importantly — effective.

Excel Worksheets
Personal budget fiascos happen when we attempt to anticipate what we’re going to make instead of actually knowing what we’re going to make. Especially for those people with irregular incomes, a personal budget can be a real challenge. How do you know how much money you’ll have in January? In February? Excel worksheets alone won’t solve your answer. It’s how the worksheets come together that forms the foundation for success with your personal budget.

A Personal Budget Solution
I’m the founder of the YNAB Personal Budget System. It consists of Excel Worksheets that are professionally done. My wife and I have used this system since we first married. When we were getting ready to marry, I realized we would need to watch our money. We were both in school full-time with low-paying part-time jobs. It should’ve been a recipe for financial disaster. It wasn’t. I developed this system that helped us then and still helps us have financial peace of mind.

Don’t be misled. A personal budget is only as powerful as the person who uses it. No system will solve your financial problems. Only you can solve them. I’ve just found that my Excel Worksheets system works the best, is a cheap alternative to expensive and cumbersome systems like MS Money, or Quicken, and offers a powerful, unique system of managing your cash flow.

Success with Your Personal Budget
The success of your personal budget depends not on how much you make, but on what you do with the money once you have made it. These Excel worksheets are tailored to a unique cash flow system that I invented through trial and error. It works!

Get started learning about this unique personal budget system by going here. You’ll learn four steps to cash flow management that should be followed to find success with your own family or personal budget. Begin now!