Envelope Budgeting with Dexter

Envelope budgeting is a systen where income is allocated to "envelopes" or "buckets" for different expense categories. When an expense is incurred, it should be paid for out of the corresponding envelope.

It is a very old and time-tested strategy and still very popular (The Envelope Budgeting Method: Does It Still Work? )

The idea is that when we go to make a purchase and there is not enough money in an envelope we should rethink our plans. If the envelope labeled "restaurants" has only $20 and there are still two weeks before the next budget period we should probably not go out to that fancy new restaurant tonight.

A related method, known as zero-based budgeting, suggests users allocate all of their income to envelopes. To use a phrase from YNAB, the goal is to "give every dollar a job."

The budgeting process should help users take the long view by allowing funds in an envelope to roll over to next period. If we know we're going to need new tires for the car some time in the next year we should start adding an extra $100 to the car envelope every month so it will be there when we need it.

Of course, we're not taping real envelopes to our refrigerators. Our envelopes are managed by our personal finance software and have a lot more flexibility. For one thing, we can allow a negative balance. If we only have $400 in the car expense envelope but can't delay the tire purchase and need to pay $600 this month it's not a problem. The car envelope will drop to -$200, but we know it will build back up in the coming months.

Integrating envelope budgeting with double-entry bookkeeping is not simple. Several people have shared their envelope budget process on the discussion boards for GnuCash and plain text accounting applications (Budgeting - plaintextaccounting.org). These typically involve setting up new asset accounts to represent envelopes and virtual transactions to coordinate expenses and envelopes.

Our method is much simpler. We don't require any new accounts or any type of virtual transactions. A single budget allocation transaction at the beginning of the month will fill envelopes, and after that all purchases automatically reduce the available funds in the corresponding envelope.

Although our approach is simpler, budget transactions have a very unusual form: they debit expense accounts and credit debit accounts. The remainder of this part of the documentation is a deep dive into how and why this approach works:

  • the first section is a review of how account balances are computed
  • the next section defines budget transactions in more detail
  • following that are discussions of how budget transactions affect the balances of income and expense accounts
  • the section on "adjustments" shows how to move money between envelopes
  • the equity account can be used in unusual situations, such as dipping into savings to fund a special trip