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.