How can I do something like the "Envelope System"

[Dennis Muhlestein]

On Jan 3, 2009, at 6:51 AM, John R. Carter, Sr. wrote:

> I'm rethinking Dennis's article and how he does budgeting.

I like what you've presented.  It helps to solve my asset and  
balancing situation.  I initially tried to do something similar, but I  
had problems reconciling where the money actually was that way.  For  
me, it isn't as simple as having one external savings account to  
represent budgeted money.  I think this is partially because I spend  
money from a lot of different sources that GnuCash is tracking.  e.g.,  
If I purchase some groceries, I might use one of a number of credit  
cards or just use a debit card or write a check.  In any case, the  
money needs to come out of the correct account.  Here are two example  
setups and transactions.

A - My method

Assets
  checking
  budgeted cash
Liabilities
  credit card
  budget
   food

Income transaction ($100 income, all budgeted toward food)
checking debit $100
income credit $100
budgeted cash debit $100
budget food credit $100

purchase transaction
credit card credit $20
expense:food debit $20
budget food debit $20
asset:budgeted cash $20

pay the card:
checking credit $20
card debit $20


B - External account method
Assets
  checking
Liabilities
  credit card
  budget:food

Income transaction ($100 income, all budgeted toward food)
budget:food debit $100 (actual money stored in separate account, not  
checking)
income credit $100

purchase transaction
credit card credit $20
expense:food debit $20

Now, you have a separate budget liability account to represent that  
money has been spent from a budget

Liabilities:budget spent
budget:spent debit $20
budget:food credit $20

Then, when you pay your credit card, you transfer some money from your  
budget spent category to your checking
budget spent: credit $20
checking debit $20  (This is followed by a real transfer of funds  
between savings/checking

And finally, pay the card
credit card: debit $20
checking credit $20

Of course, if you can pay your credit card with your savings you avoid  
one transaction, then you could just show:
budget:spent credit $20
credit card: debit $20



Perhaps you have a better way to accomplish this but this is what I  
gleaned from your email.  in my scenario B, it requires more  
transactions than A but it is more representative of how things really  
ought to work I think.  I think my biggest problem with scenario B is  
that 1, I don't have physical bank accounts that mimic what is set up  
here and I haven't figured out how with GnuCash to represent what is  
unique to me.  One issue for example is that I frequently transfer  
amounts from checking to an equity account earning me interest, and  
then transfer the money back out to pay bills as needed (hopefully  
lots less than I transferred in ;) ).  I want to track my budget no  
matter where I decide to store my money.  e.g., I may get money as  
cash that I don't deposit but have an assets:cash account for.  I want  
to track that as well but I may not deposit the money into the bank at  
all.  Hence the virtual asset:budgeted cash account which really  
doesn't exist.

I also think we're really getting somewhere with this and that GnuCash  
is very cool.  What other software lets you do all this stuff however  
you want!


-Dennis


>
>
> It seems to me that a combination of scheduling and allocation of  
> funds to separate GnuCash accounts and one special external savings  
> account will do all that everyone wants, and without opening up the  
> budget feature in GnuCash.
>
> First, set up the accounts in the prescribed default manner (with  
> subaccounts and all) creating separate liability accounts for each  
> budget item.
>
> Here's a sample chart of accounts:
>
> Assets
> . Checking
> . Savings
> . (other Assets)
> Expenses
> . Auto
> . Home
> . Groceries
> . Insurance
> . . Auto
> . . Home
> . (other Expenses)
> Liabilities
> . Budget (in reality is a savings account, but must be different  
> than the one under Assets)
> . . Auto
> . . . Maintenance
> . . . Fuel
> . . . Insurance
> . . Home
> . . . Maintenance
> . . . Insurance
> . . Groceries
> . . (other Budget items)
> . Mortgage
> . Credit Cards
> . . Visa
> . . Master Card
> . (other Liabilities)
> Income
> . My Job
>
> Then, in GnuCash schedule transactions that transfer funds from  
> income to a liability account that is earmarked as a budget item.  
> Then, when you spend money from the liability budget account it is  
> balanced against an expense account. This is really no different  
> than treating the liability budget account like a credit card in  
> which you initially put money in instead of starting with a zero  
> balance and charging against it.
>
> The scheduling activity takes the place of the budget feature in  
> GnuCash. You can change the amount of money to transfer from income  
> to liability at will. As you spend from a liability account you will  
> know instantly when you are about to exceed the funds in that  
> account (the balance is normally red showing a surplus and will turn  
> black when overdrawn). You really don't need to maintain separate  
> external savings accounts unless you want the budget money to earn  
> interest while you're waiting to spend it (wise idea, though). If  
> you did put all the budget money into one external savings account,  
> you would need to arrange for automatic transfer of money from the  
> checking account to the savings account, then do transfers from  
> savings to checking to cover expenses from the budgeted accounts.  
> But this external savings account needs to be set up in GnuCash as a  
> liability not an asset.
>
> This gives you everything you need for budgeting. The income is  
> transferred to the external savings account identified for holding  
> budget funds. That money is allocated to the appropriate liability  
> accounts in GnuCash that are set up for budgeting. Expenses from  
> those accounts are assigned to the appropriate expense account. The  
> balance sheet will automatically show the bottom line. Reports will  
> be easy to create to track budgetary expenses and balances. On  
> payday, you have an automatic bank transfer from checking to savings  
> for the total budgeted amount and the GnuCash scheduled transactions  
> determine how it is allocated to the several liability (budget)  
> accounts.
>
> On Jan 2, 2009, at 11:17 PM, Rafferty Uy wrote:
>
>> Very nice article. I also plan to write a blog on this very nice  
>> tool next
>> month. I just want to see how things will go after 1 month's income  
>> and
>> expenses first.
>> Anyhow, I think I have the scheduled transaction set up. I'll just  
>> wait and
>> see how things go :)
>>
>> Thanks for everyone's help.
>>
>>
>> Rafferty D. Uy
>> Software Engineer @ ease solutions Pte. Ltd.
>> MBA Student @ National University of Singapore
>>
>> "Business is a game, the greatest game in the world if you know how  
>> to play
>> it."
>> ~ Thomas J Watson (Founder of IBM)
>>
>>
>> On Sat, Jan 3, 2009 at 12:03 AM, Dennis Muhlestein
>> <djmuhlestein at gmail.com>wrote:
>>
>>> Rafferty Uy wrote:
>>>
>>>> Hi,
>>>>
>>>> Does anyone know how to do something like the envelope system?  
>>>> Here's the
>>>> idea:
>>>>
>>>> You have a payroll account, where every month a fixed amount is  
>>>> deposited
>>>> by
>>>> your employer.
>>>> You want to allocate this amount to different "envelopes", but  
>>>> all kept in
>>>> your bank account.
>>>>
>>>> So for example you have a bank account with a total deposit of  
>>>> $1000, you
>>>> know that this $1000 is composed of $200 in savings, $300 in  
>>>> bills, $400
>>>> for
>>>> daily necessities and $100 for unplanned things.
>>>> Is there a way to do this automatically for every pay day?
>>>>
>>>>
>>> I prefer referred to my budget article in another email I just  
>>> sent.  I use
>>> the envelopes system w/ GnuCash.  It allows me to spend money with  
>>> any
>>> account (I don't use the subaccount menthod) and from any budget.  
>>> You just
>>> have to manually record which budget account you use. j
>>>
>>> There may indeed be a better way to do it, but it is working very  
>>> well for
>>> me.
>>>
>>> http://allmybrain.com/2008/12/15/better-budgeting-with-gnucash/
>>>
>>> -Dennis
>
> --
> John Carter
>