OK, out of popular demand, I’ve decided to revisit this topic. My original Better Budgeting with GnuCash article is still highly relevant and worth a read for the background if you haven’t read that yet.
The method I proposed in my 1st article works. I used it for over a year with great success. After some time though, I decided we could simplify a few things.
- The Budget Accounts
The reason there is a set of budget accounts in my original setup stems from that fact that most people have multiple places they spend money from. We have credit cards, cash, sometimes more than one bank account, etc. You are free to track as many sources of spending as you like with this method. It is cumbersome to add a separate budget transaction every time you spend money though. It’s powerful, but cumbersome.
I eventually decided to do away with my budget hierarchy of accounts. Instead, I decided to make my main checking account my budget account. The envelope budgets are sub-accounts under my main checking account.
- Managing the Budgets
The concept is still the same. When you get money, you put it into your budget accounts.
OK, a couple things to explain here. First, I still recorded the deposit as two transactions. I did it as one transaction with the total paycheck going into the checking account and then a portion of that paycheck going into each budget account. You don’t have to do this though. You can of course just deposit the paycheck into each budget account.
BUT… I do this so that when I reconcile the account I can find the actual deposit amount. More on this later.
Next I want to point out that I didn’t budget the entire amount. I simplified my original concept by only creating budgets for things we must spend or would like to specifically save for, e.g., vacation fund. This leaves a balance in the main checking account. I then use that balance for all the miscellaneous charges that we come across each month. I had a miscellaneous budget before but eventually I decided that was just too much extra work to keep track of.
- Tracking Expenses
Entering expenses becomes easier now. When you buy something, you either take it out of the budget account for the expense or you just take it out of the balance in the main account for everything else.
If you have a transaction for something not budgeted for, you just take it out of the main account.
In both of these situations, you’ll noticed you don’t have to double account. Yeah! Simplified.
- Credit Cards
Our next step was to stop using credit cards. We have always paid the balance in full but I eventually came to the conclusion that whatever rewards cards offer just aren’t worth the extra time to track everything. Some research suggests when you buy on cards (even if you do pay in full the balance every month) that you tend to spend more than you would have otherwise anyway. So simplify your life and just stop using the cards! Instead, we just use our main checking account check/debit card. Same convenience, easier to track.
Wait, you say you still need to use the card. OK, it’s easy. But you have to double account for it if it is a budget account. If it isn’t a budget item then you just account as normal but you have to keep in mind that the balance in your checking account has to be used to pay the card bill eventually, i.e., without using the card you can always look at your budget accounts and know how much money you have but when you add the card to the mix you are negating the envelope system slightly. You can create a “pay the card” budget if you like though to help manage that.
The first transaction simply assumes when I pay the card I’ll use some of that extra unbudgeted money. the second transaction explicitly takes some of my auto budget money and puts it back in the main account.
Reconciling is something thats actually not as easy when you use this method. I mentioned earlier that I still double recorded the deposit. You can also just record the deposit normally and then make a special budget transaction and accomplish the same thing. Either way, if you record the deposit this way, when you reconcile your account you’ll be able to match it to the bank statement easier. It’s more so this way for when you make purchases. Suppose you buy something at the store that takes two budgets. You still might want to double record the transaction so you can find the purchase when you reconcile.
Just choose “include sub-accounts” when you bring up the reconcile dialog. You’ll have transactions that aren’t on the statement (moving budget money around) but you can do a real reconcile with the actual transactions and then do another reconcile and simply check all the budget transactions (they should still all balance to 0)
Hope you enjoy. This has simplified our budget system quite a bit but still provides the power of envelope budgeting I originally proposed.