Finances lets you manage a budget based on the envelope system. The idea behind this system is to store cash for different categories in separate envelopes. Expenses of a particular category are only paid from the designated envelope. The envelope system makes sure that you don’t spend more money as planned.
For example there are envelopes for groceries, holiday and entertainment. If you buy groceries, you only use money from the groceries envelope. If at one point there is no more money left in an envelope, you either take money from another envelope or reduce the expense.
There are different ways to do envelope budgeting in Finances – with sub-accounts or a dedicated budget account.
Envelope System with Sub-Accounts
In the envelope system with sub-accounts you first choose the account which is used to pay for budgeted expenses. Then create sub-accounts for all categories in your budget.
For example if groceries are paid with the debit card, create the sub-account Groceries under your checking account. Here is an example of a simple budget.
1Assets 2└── Bank $ 1.000 3 ├── Groceries $ 0 4 ├── Holiday $ 0 5 └── Entertainment $ 0
The budget is allocated by transfering money from the checking account to the sub-accounts.
12018-05-01 Budget May 2018 2 Assets:Bank -$ 400 3 Assets:Bank:Groceries $ 200 4 Assets:Bank:Holiday $ 120 5 Assets:Bank:Entertainment $ 80
1Assets 2└── Bank $ 1.000 3 ├── Groceries $ 200 4 ├── Holiday $ 120 5 └── Entertainment $ 80
The sub-account balances indicate how much money you can spent for a specific category. The budget allocation transaction didn’t change the checking account balance because money was transfered to sub-accounts.
When you pay for a budgeted groceries expense you don’t use the checking account but the Groceries sub-account.
12018-05-03 2 Assets:Bank:Groceries -$ 60 3 Expenses:Groceries $ 60
This transaction reduced the groceries budget from $200 to $140.
Envelope System with Budget Account
A budget can also be managed with a dedicated budget account. This account contains all budgeted money. A budget is allocated by transfering money to the account. An expense debits the account.
As in the previous example there are sub-accounts for every category in your budget. But this time they are created under the budget account and not the checking account.
1Assets 2├── Bank $ 1.000 3└── Budget $ 0 4 ├── Groceries $ 0 5 ├── Holiday $ 0 6 └── Entertainment $ 0
The budget is allocated by transfering money from the checking account to the budget sub-accounts.
12018-05-01 Budget Mai 2018 2 Assets:Bank -$ 400 3 Assets:Budget:Groceries $ 200 4 Assets:Budget:Holiday $ 120 5 Assets:Budget:Entertainment $ 80
1Assets 2├── Bank $ 600 3└── Budget $ 400 4 ├── Groceries $ 200 5 ├── Holiday $ 120 6 └── Entertainment $ 80
When you pay for a budgeted expense you use the budget sub-accounts.
12018-05-03 2 Assets:Budget:Groceries -$ 60 3 Expenses:Groceries $ 60
Which system should I use?
Both systems have advantages and disadvantages. Use the system which work best in your situation.
The envelope system with sub-accounts has the advantage that money stays in the main account because it’s only transfered to sub-accounts. Which means that the account balance doesn’t change. You should prefer this system if your budgeted expenses are always paid from the same account.
If your budgeted expenses are paid from multiple accounts, then you should use a dedicated budget account. But keep in mind that once you allocate a budget, that the account balances may differ compared to your real account balances.