Just Use Bigger Envelopes

Via Instapundit, comes this critique of the "envelope" method of household budgeting.

These are all valid criticisms. Which is why I use rolling envelope approach and also do what any military historian would do--I hold a strategic reserve in the bank and commit it when necessary. Then rebuild the reserve.

The reserve part is obvious. I have a reserve of money. If I spend less in a month on entertainment, for example, I put it in the reserve envelope. If I have a big expense--like furniture or Michigan season tickets to football--I commit the reserve. So that spending doesn't interfere with regular budgeting.

If I spend just a small amount over an envelope allotment, I count the excess amount to the next month and so just spend a little less in that category than I normally would in the next month.

Judgment is important when considering the reserves. If my bar tab is higher than usual, that's something I reduce future month bar envelopes to pay for. I wouldn't commit the strategic reserve for that. The strategic reserve is for things like a replacement furnace or a new television.

Or if I note I am spending less in the grocery category than planned at the end of the month, I'll buy extras for the future that I don't quite need yet but which store nicely--saving me from a future envelope problem when I need that rarely purchased item.

I do the same for needed items on sale. It would be foolish to miss a good price because I'm tied to the monthly envelopes. I just restore the long-term spending average in future months. Or commit reserve funding or transfer funding, as necessary.

If it is an in-between extraordinary expense--like that Christmas purchase example--I pay myself installments in future months by reducing relevant monthly envelopes for a set amount of time. But I pay off the debt to the card holder immediately.

Tax refunds always go into the reserves. Plus a monthly amount goes into the reserves.

I even keep an operational reserve at home for an unexpected small expense. That bar tab might be an example, depending. And a tactical reserve of a $20 bill in my wallet that I never touch except in an actual emergency like needing a cab ride home or a scone and coffee with a really hot female I just met.

On expected periodic payments like insurance bills or property taxes, I budget those amounts each month (1/12 or 1/3, or 1/4, as appropriate) so that when the actual bill arrives, it isn't a budget breaker. Technically, I'm spending less than my budget in certain months I don't have those bills, but I don't see the "excess" money because I've already "spent" the money in the budget.

Utilities are averaged in my budget so that I don't have to sweat high gas (winter) months or high electricity (summer) months. Energy bills rise and fall, and by the end of the year, I've used up my envelope on an annual basis even if the monthly basis shows some months under envelope budget and some over. This is a variation of committing reserves and replenishing them, but in an automatic manner.

And obviously, I alter the envelope amounts as reality changes. My gasoline envelope is an obvious example since it is the most volatile. If I find I've had to commit reserves a couple months running to that envelope, I increase that envelope and reduce others to compensate. That's the way it goes.

In a family budget where budget authority is divided, it may be difficult to negotiate a new envelope allocation. I wield supreme economic authority in the TDR home, so I have sequester flexibility unchecked by popular sentiment.

So the key to the envelope method is not going paycheck-to-paycheck so you have flexibility; and having the authority to adapt to reality. Over a course of a year, the envelopes balance.

I don't know. I just don't find household budgeting that difficult. I never have found it tough, even when a broke college student and struggling newcomer to the world of work. Awareness of spending and income, basic math skills, the proper horizon, flexibility, and reserves, combine to make it work for me.

Anyway, I'm sure that bit of household budgeting wisdom was a fascinating change of pace from the usual.