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I use digital envelope budgeting by creating subaccounts in gnucash and allocating my income between the subaccounts every month.

Some expenses are relatively constant every month. Examples are groceries, electricity, internet, telephony, magazine subscriptions, and of course rent.

Other expenses vary between months, but are relatively constant year to year. Example are heating, holidays, license fees, and subscriptions that are charged yearly.

But others yet are even more occasional. I might go several years without buying furniture, then at some point I might replace the fridge, buy a dishwasher and a new sofa. I find it difficult to know how much money to put in the envelopes covering those categories, but that is not my question here.

I've seen websites recommend that the envelopes should be emptied every month, but that doesn't seem useful for something like holidays, where I might spend many months spending 0 and then one month spending more than €1000. On the other end, if I don't empty them at all, the amount in some categories just accumulates over time, which might not be very useful either.

What should I do with money left in envelopes (subaccounts) at the end of the month or year? Should I clear them at all, if yes, how often?

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    "I've seen websites recommend that the envelopes should be emptied every month". What do they say is he purpose of emptying it every month?
    – RonJohn
    Nov 28, 2022 at 18:35
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    This isn't a full answer but I 'zero' out the account on payday by putting that extra money into savings. Savings then becomes the bucket for whatever big purchase is next (vacation, car, large appliance, etc) Nov 29, 2022 at 14:50
  • Extending off of @RonJohn, what is the problem attempting to be solved by selecting for a ridged schedule for zeroing them? Why not have different schedules for different categories of envelopes (does gnucash have automation that does not allow such)? Or add and remove envelopes as events arise (e.g. dishwasher may need replaced soon, but at an unknown date and it could be 5 to 15 years before it needs replaced again).
    – Kevin
    Nov 30, 2022 at 17:00
  • I'm doing the zeroing manually in gnucash, but I'm not a power user and maybe I could do it automatically or maybe I'm using the wrong tool.
    – gerrit
    Nov 30, 2022 at 17:13

5 Answers 5

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It depends on which "envelope" we are talking about, and it also comes down to personal preference.

Before we talk about the two strategies, it is important to note, as you do in your question, that there are "envelopes" that are spent from on a regular basis (some are monthly or more often, others are annually), and there are some that are essentially long-term savings for a particular purpose. We are talking about the regular spending envelopes, not the long-term savings envelopes. When you empty a regular spending envelope, the idea is that you then deposit that money into one or more of the savings envelopes.

Those that tell you that the "envelopes should be emptied every month" do so for a few reasons:

Emptying your envelopes at the end of the month and then funding them with the current month's income ensures that you do not ever spend more in a month than your monthly income. For example, let's say that you allot $200 monthly in a "restaurant" envelope. If you have a month where you only spend $100 at restaurants, then the next month when you add $200 more, you could potentially spend $300 the next month if you do not first empty the envelope. By limiting the amount in the envelope, it encourages thrift.

Another benefit of emptying the envelopes is that it allows you to reach your long-term spending goals faster. For example, let's say that you are saving up for your next car. Perhaps you put $400 each month in that envelope. But if you have a month where you only spend $100 at restaurants instead of the $200 allotted, at the end of the month you can take that extra $100 and put it in the car fund, and you will be able to get that next car sooner.

That having been said, for some categories, you might want to let money accumulate. For example, perhaps you are a music enthusiast and enjoy going to concerts. You may want to skip a concert this month to be able to buy a ticket to a bigger band next month. There is nothing wrong with doing this, if you choose.

Personally, I sort of do a mix of both. I don't always empty every spending envelope every month, but occasionally I will pull money out if too much accumulates and put it into one of the long-term savings categories.

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  • Emptying your envelopes at the end of the month and then funding them with the current month's income ensures that you do not ever spend more in a month than your monthly income. — unless, like me, the digital enveloped (gnucash accounts) go negative :-) (but then it's immediately clear I'm overspending or underbudgeting)
    – gerrit
    Nov 28, 2022 at 15:28
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    @gerrit Yes, the idea behind the digital envelope system is that you actually look at your "envelope" balance before you spend, and you keep the amounts positive. :)
    – Ben Miller
    Nov 28, 2022 at 15:30
  • If I only spend a portion of an envelope’s balance this month, then I absolutely roll that to next month., since the whole point (to me, at least) is to “spend” all your money every month. (I “spend” money on Savings and Investments, for example.)
    – RonJohn
    Nov 28, 2022 at 18:19
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The envelope or cash-stuffing system is a take on a zero-based budget. In a zero-based budget you plan what will happen with every dollar of income (give every dollar a purpose). That doesn't mean it is rigid.

When things don't go according to plan, you re-assess and make a new plan. Monthly zeroing out accounts that are used for infrequent expenses would make no sense, that money is still being used according to plan. However if your grocery account is ballooning up because you over-estimated how much you'll need then it could make sense to adjust it.

The decision about what to do with excess will vary by account, amount of overage, and by whether or not you have shortages in other accounts. Part of planning is deciding what to do when things go off plan. I suggest not worrying about it too much, cover shortfall with overage in another account as needed, re-assess annually unless you're consistently short in certain accounts. For accounts that you do want to zero-out monthly you just want to decide up front what goals that money should be put toward. The power of a zero-based budget is really in the planning and focus on spending, not in the adhering perfectly to a rigid plan.

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  • It may also make some sense to have an "emergency use only" envelope. As of January, a majority of Americans would be unable to pay for a $1000 emergency out of their savings. Of course, this is dependent on having a good, strict definition of "emergency" - "the thing I really want is on sale" doesn't count.
    – Kevin
    Nov 29, 2022 at 16:55
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I did something similar to the envelope system long before I heard the term.

I saw two types of envelopes:

  • Type 1 which I topped up the envelope to the monthly level. Lets say I was expecting to spend $100 a month, but instead I only spent $64.00 I just replace the $64.00 at the start of the next month.
  • Type II in which I was saving for an expense that would only happen once or twice a year. This could be life insurance, auto insurance, or property tax.

The first type has to be handled carefully because if the reason why the grocery envelope has funds is that there were only 4 weekends this month, but others have 5 weekends.

I use the extra funds to keep the emergency and life happens funds fully funded.

then at some point I might replace the fridge, buy a dishwasher and a new sofa

If I know months before I buy them that I will be buying them I setup a Type II envelope. If it is a surprise then the money comes from the life happens fund.

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  • Sometimes the envelope, or "reserve" is for a really long-term purpose. For example, my gliding club operates a Piper PA-25 Pawnee as a tug aircraft. This is a fabric-covered aircraft that requires fabric replacement every 10 years or so. It requires engine servicing after every 100 hours of operation (which we treat as a recurrent expense) and an engine rebuild after every 1000 hours of operation (about 6 or 7 years of elapsed time). We budget for the fabric replacement and engine rebuilds and it would be crazy to zero out these reserves for long-term projects every 12 months. Nov 30, 2022 at 11:48
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The "envelope system" is also used in proper corporate accounting. If you are on the Board of a corporation, you often set up "funds" in the accounting system for exactly this purpose. For seasonal bills the accounting staff has amortized to a monthly cost, and the Board simply sets a budget which allocates that amount monthly to the "fund".

Same thing for long-term projects like replacing roofs, vehicles and special equipment. But when corporations do it, the stakes can get a bit higher, as almost 100 residents of a high-rise condo fatally learned.

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  • And they’re called sinking funds.
    – RonJohn
    Nov 29, 2022 at 21:59
  • fatally? Did people die?
    – gerrit
    Nov 30, 2022 at 8:16
  • @gerrit indeed, read the article
    – Esther
    Nov 30, 2022 at 20:03
  • @Esther Ah, hidden in the smallprint; I was confused because the article isn't about the building that collapsed, but about a different building.
    – gerrit
    Nov 30, 2022 at 21:23
  • @gerrit yes, it was terrible. They had finally overcome political resistance to spending the money, pulled permits, let bids, but they were like "well the really horrible decay was on the pool deck so what's the worst that could happen?" Sadly when the pool deck punched through its pillars, it pulled sideways on the pillars which did support the building. Nov 30, 2022 at 22:13
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What should I do with money left in envelopes (subaccounts) at the end of the month or year?

Not knowing how Gnucash works, my only experience is with cells in a spreadsheet. Every month, I add a fixed amount to each cell, and spend what I need to from them until they go to zero. If I spend less than the whole amount, I roll it over to the next month.

For example, my Miscellaneous digital envelope (DE) gets $300 every month. For the past few months, I've been spending much less than $300. Thus, the balance has been growing.

This has been a "big spending" month, so as of today the balance is almost $0.

That's ok by me, since my definition of "spending" is "putting a fixed amount into a DE every month". What I do with the money in that DE is irrelevant to my monthly budget.

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