Envelope Budgeting

Rough notes only at this stage!

This description assumes you are starting from scratch with a completely new, empty, Moneydance file. Before you start, delete all existing accounts and categories, even those which Moneydance may have automatically created.

This article assumes you are familiar with the concept of Envelope budgeting, from an Income Cash Pool.

Create Accounts

Add your bank accounts and credit cards, but leave all the starting balances as 0. Later, we will add special transactions to get the starting balances right.

Create Budget Categories

Add whatever categories you want for your budget (Groceries, Fuel, Dining, etc.), but make sure they are all INCOME categories. This is important: it means that when we have funds available to spend in this category, a positive balance is displayed. When we have overspent, a negative balance is displayed. This is counter-intuitive - we normally think of these as expenses rather than income - but it's the only way to get the behaviour we want from Moneydance.

Create one more INCOME category: the Income Cash Pool (referred to as ICP from now on).

You should now have:

1. Your bank accounts, all with a starting balance of 0.
2. Your budget categories (envelopes), all of type INCOME (rather than Expense).
3. Your Income Cash Pool (ICP), another INCOME category.

If you have any categories of type "Expense", then you have done something wrong. Delete those categories and re-create them as Income categories.

Set Starting Balances

Bank Accounts

For each bank account, create a new transaction to set the correct starting balance. In the Description field for the transaction, enter "Starting Balance". The category should be your ICP. The amount should be a deposit of a positive amount.

Once you have done this for each account, check the balance of your ICP (Tools -> Edit Categories). This should be equal to the total amount of money you have in your bank accounts.

Credit Cards And Overdrafts

If you have credit cards (or bank accounts which are currently overdrawn), then set the initial balance by making the amount a payment rather than a deposit. This will reduce the funds you have available in your ICP; if you have £500 in the bank and £150 owing on your credit card, then you have £350 available in your ICP with which to fund your envelopes. The extra £150 in your bank account is for paying off the credit card.

(This assumes your credit card is used for regular spending, and is paid off in full each month. If you are carrying a long-term debt on a card, which you are paying off gradually, leave this credit card alone for now. We'll come back to it later.)

Initial Funding

Tools -> Edit Categories. Double-click on Income Cash Pool. You should see the "starting balance" transactions from your various bank accounts. It's now time to split the available funds into your various envelopes.

Create a new transaction in the Income Cash Pool register. Describe it as "Initial funding". Ctrl-L (Split).

Use splits to enter your initial funding amounts for each category. For each split, the Category should be the category to receive the funds, and the amount for each category should go in the "Increase" column. The "Deposit" readout at the bottom of the Split window will show the total amount you are going to fund into the various categories from your ICP. Record this transaction.

Now, your ICP will still contain whatever's left over from your initial funding (hopefully nothing, if you're using the envelope budgeting model properly!) and the individual categories will have positive balances showing the amounts you funded them with.

Now you can start spending. Record normal expenditure in your bank account registers as normal, assigning the transactions to the appropriate categories. As you spend, the positive balances in the categories will reduce until they are topped up again in your next round of funding. The best way to monitor the categories at the moment seems to be Ctrl-Shift-C as a shortcut to the Edit Categories window.

Regular Funding

When you receive new income, be it from a regular source such as salary, or one-off bonuses or gifts, you need to assign the income to your ICP. The income transaction to your bank account should be another deposit to your ICP, as with the initial funding. The process of splitting the income into the envelopes is also the same; make the splits from the ICP into the various envelopes.

For regular income, the burden of splitting the funds from the ICP to your various envelopes can be reduced by using a consistent description, e.g. "Funding from Bob's salary"; Moneydance will helpfully recognize the description and pre-fill all the splits with last month's values, so you don't have to change anything from month to month (unless you want to.)

Irregular income is treated just the same; simply make the transaction a deposit into the ICP, and split it into your envelopes as required. If you have a specific envelope in mind for irregular income - for example, someone gives you a one-off gift for your vacation - you can make that transaction a deposit directly into the "Vacation" envelope, without going through the ICP.

Funding Debt Repayments/Credit Cards