Envelope budgeting

The budgeting method Pentos implements, and why it only deals in money you already have.

Envelope budgeting is older than software. The original version was literal: cash came in, you divided it between labelled envelopes, and when an envelope was empty you stopped spending on that thing.

Pentos is that method with a ledger behind it.

A budget is not a forecast

Most budgets fail the same way. You estimate what you will spend on groceries next month, the estimate is wrong, and by the third wrong estimate the budget has stopped meaning anything.

An envelope budget avoids that by never estimating. You budget only money that is already in your accounts. There is nothing to be wrong about: either the money is there and you can assign it, or it is not.

The question changes from how much will I spend on groceries to how much of the money I have right now am I willing to commit to groceries. That second question has an answer you can check.

Give every unit of money a job

When money arrives, it lands in a pool called To Budget. Money sitting in To Budget has no job yet.

Your work each month is to hand it out until To Budget reads zero. Rent gets its share, groceries get theirs, and so does the annual insurance bill you would otherwise be surprised by in March.

Zero is the target, and it does not mean you have spent everything. It means every unit of money you hold is spoken for, including the parts spoken for by future months.

Spending happens against an envelope

You record what you spend and assign it to a category. The envelope’s balance falls. When it reads zero, that is not an error message, it is the answer to what you can still spend on that thing.

What you do next is the part people find surprising: you move money. If groceries ran dry and the restaurant envelope is untouched, take it from the restaurant envelope. Nothing has gone wrong. Deciding what to give up in order to buy something else is the whole exercise, and the app just makes the trade visible at the moment you make it.

Tip

Moving money between envelopes is not cheating. An envelope budget that is never rearranged is a budget that was guessed correctly the first time, which does not happen.

What is left rolls forward

Money you do not spend stays in its envelope. Leftover grocery money in March is grocery money in April, without you doing anything.

That is what makes an envelope pay for things that do not arrive monthly. Put a twelfth of the insurance bill into an envelope each month and by March the envelope holds the bill.

Overspending is handled the other way round, and Rollover and overspending covers exactly how.