Which Household Budget System Is Best For You?

A Cash Flow Plan (budget) is the single most powerful personal finance tool anyone can use for wise money management.  But this is not a one-size-fits all proposition; there are different planning and tracking systems, each with its own advantages.  Here are the options, along with my recommendations as to who would benefit the most from each one.

The Envelope Budget System

This system is best for people who prefer to use cash whenever possible but also pay some bills online. It’s also a great system for those who do not have much money in reserve.

Each time you get paid, fill envelopes with the amount of cash you have budgeted for specific spending categories until the next time you’re paid. For example, if you get paid once a month and have a $400 monthly grocery budget, each time you get paid put $400 in cash into an envelope marked “Groceries.” When you go grocery shopping, take that envelope with you, pay for your groceries with the money in the envelope, and put the change back in the envelope.

Of course, you won’t want to use an envelope for every spending category, like your mortgage.  But envelopes work really well for categories like food, clothing, dry cleaning, gifts, entertainment, home maintenance, gasoline, vehicle maintenance, and miscellaneous.

When you’re out of money in a certain envelope, you’re done spending in that category until your next payday. If there’s any money left over at the end of a period, keep the money in the envelope so you have more to spend over the next period. This is especially important for categories like vehicle and home maintenance. Some months you’ll spend little or nothing in these areas, but other months you’ll have to spend a lot, so you’ll be glad the money has been accumulating.

The Paper-And-Pencil Budget System

This is best for people who use a combination of cash and debit/credit cards, pay some bills online, and have some money in reserve.

Using the forms on my web site, and referring to the Budget Quick Start Guide, complete the Cash Flow Plan. Then, in the “Goals” row across the top of the Cash Flow Tracker, enter your income and expense goals from the Plan.

Track your spending by keeping receipts or by writing down how much you spend during the day and then enter that information on the Tracker at the end of each day.

At the end of the month, total up each category and then indicate how much over or under your actual spending was compared to the goal. Since you will use one form for each month, look at the previous month’s Cash Flow Tracker to see how much over or under you were up to that point in the year, and enter that on this month’s form. Then total up how much over or under you are for the year.

The Electronic Budget System

There are three different electronic budget systems.

An Excel spreadsheet budget. This is best for people who like the layout of the paper-and-pencil system but prefer to use an electronic tool.

On my website, you’ll find downloadable Excel spreadsheets formatted just like the paper-and-pencil Monthly Cash Flow Plan and Monthly Cash Flow Tracker. This can simplify some aspects of the paper-and-pencil system by totaling your columns automatically.

Budget software. This is best for people who are comfortable downloading financial transactions from their bank and credit card companies and like detailed reports about their finances.

Software programs can download your checking, savings, and credit card transactions through an online connection with your bank and credit card companies. It can also download the latest information from your investment accounts. Quicken is the main game in town, but two other software programs that have gotten good reviews are Mvelopes and You Need a Budget.

One downside to budget software is that it’s tied to one computer.  Another is the cost. To overcome these issues, you might consider the third category of electronic tools.

Online budget tools. These are best for people who are comfortable doing online banking, prefer to have their budget available online, and don’t need a ton of detail.

The first step in using an online budget tool is the most unnerving for the uninitiated: You have to enter your bank and credit card account numbers and passwords. The leading providers know that people’s number one concern is security, so they go to the nth degree in making sure their systems are secure (I wrote previously about this in an article entitled, “Is Mint.com Safe?”). Still, if you’re not comfortable with this, use one of the other systems.

Once you are set up to allow the service to access your records, it will download your latest transactions automatically. It can also be set up to automatically categorize certain transactions for you, which can save some time. For example, if you do most of your grocery shopping at Safeway, you can instruct the system to categorize all Safeway transactions as groceries. You can also go in and manually make adjustments, such as when you get cash back or pick up a prescription.

The major players in this category include Mint, Yodlee, and moneyStrands.

Where to Start

If you’re new to budgeting, I recommend that you start with a manual system like the envelope system or the paper-and-pencil system for at least the first year. This will give you more of a hands-on feel for the budgeting process. Once you get comfortable with budgeting, you could switch to an electronic system.

No matter which system you use, remember to use my Recommended Spending Guidelineswhen deciding how much to allocate to each category of your cash flow plan.

Which budget system do you prefer and why?  Please leave a comment below.

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11 Responses to Which Household Budget System Is Best For You?

  1. Rachel Topham October 21, 2016 at 6:05 PM #

    If looking for a daily budget tool that is free …i love Goodbudget app..for keeping track of daily expenses..type in income and it comes with 10 free “envelops.” can get more envelopes for small fee. I have set budget but my income as a nurse fluctuates alot being paid hourly and differentials and overtime and holiday pay so i can set up and adjust as needed. Easy to use …it’ll take too long to describe here but i recommend checking out in google store…it may be bit frustrating for 10 min figuring out to set it up but a little playing with it wont take long…its great for daily budget expenses paid with a report summery tab….i then take that info at end of month and apply info to my pen paper longterm record for year (i hate and dont trust computers…they take too long and are aggravating!????!!)and dump any extra income at end of month in to miscellaneous savings…which i can draw on if need too in case food expenses or car repair one month took more than the budget envelope had in it…

  2. Tara June 1, 2013 at 4:19 PM #

    Hi Matt,

    I’d like to put together a budget after not having one for maybe 18 years. I use Quicken for my checking account and categorize expenses. Is there a way to use Quicken to budget since I already input a lot of data into it?


    • Matt Bell June 3, 2013 at 7:50 PM #

      Hi Tara –

      We used to use Quicken for our household budget (switched to Mint about 4-5 years ago), and it works well. If memory serves, there should be a planning tab. Click on that and you should see “budget.” You’ll be able to create a budget from there. Since you’re already tracking your expenses, an important key to really using Quicken as a budget is to make sure you categorize your transactions according to how you set up the categories with the budget. Then you should be able to check at any point in time and see how you’re doing in each category – if you budgeted $750 for groceries, for example, you’ll be able to see how much you’ve spent at any point in the month compared with that target.

      Let me know if you have other questions. I hope that helps. Oh, and you might find my Recommended Spending Guidelines helpful as well. You’ll find them in the Resources tab of this site.

  3. Matt Bell February 2, 2011 at 8:26 PM #

    Thanks for letting me know about this — I hadn’t heard of it before.

  4. Chi-Ming Chien February 1, 2011 at 4:23 PM #

    Thanks for the helpful breakdown of different types of budgeting systems.

    My wife and I use the envelope budget system for our family budget, but modified somewhat.

    We started keeping a budget based on the envelope system back when we spent a summer in Oakland doing an “urban plunge.” We lived in a small household of 5 people for 7 weeks, worked with non-profits and area churches–and had exactly $12.50 per person per week for food, gas, laundry, and pretty much everything else except rent and utilities. This was in the mid 90’s, but, still–that’s not a lot of money. Folks wondered if we would taste any meat that summer…

    The household pooled all of the allotted money together and put it in a #10 envelope that we would physically carry around when we went to the grocery store and elsewhere. And, surprisingly, we actually were able to keep to that budget and even enjoy a movie out once.

    Once my wife and I got married, we kept with that system for our discretionary budgets: primarily groceries and eating out.

    Fast forward a decade or so, and I’m working with a San Francisco web development team and watching people carry smartphones that are starting to do more and more. We knew that the envelope budgeting system really worked to keep a tight budget, and, given the recession, decided to put together a virtual version of the envelope budgeting system that could help folks control their spending. We figured we could eliminate the hassle of carrying physical envelopes *and* allow spouses to share envelopes and record transactions on-the-go–kind of a cross-over envelope and electronic system in your breakdown, with the benefits of each.

    We called it the Easy Envelope Budget Aid (EEBA for short). We’re excited that we’re got over 50,000 registered households a little over a year in. Users can record transactions from their Android devices (common ones can be entered in as few as 3 touches) and from our mobile-optimized website. Or they can access EEBA via the full desktop Website. Transactions are automatically sync’ed across both spouses’ Droids plus the website so everybody’s always on the same budgeting page. This video shows how it works: http://www.youtube.com/watch?v=x8cB5q2Luyo

    EEBA requires absolutely no personal information–no bank account numbers, no passwords–addressing the security issues that cause some people concern. But, we do allow you to import in QFX and OFX format the statements that you can download from your bank website. And EEBA will help match bank statement transactions with ones you’ve entered yourself. Our website is at https://eebacanhelp.com.

  5. Matt Bell January 29, 2011 at 4:29 PM #

    Sounds like a great idea, Dale. This is a great example of the fact that there’s more than one way to budget. The best budget is one that meets our needs.

  6. Dale January 29, 2011 at 4:06 PM #


    We use two systems. Part of my check goes into an account used for groceries, clothing, entertainment and other miscellaneous items that my wife manages similar to the envelope system. The rest goes into a different account for all other regular bills that I manage with a customized excel spreadsheet. It’s worked well for us for the past few years!

  7. Matt Bell January 25, 2011 at 12:39 PM #

    David, I know they switched how they gather their data somewhat recently and I believe that caused some problems that they acknowledged and said they were fixing. I wonder if that’s the issue you experienced. Regardless, it sounds like it caused you a lot of problems. Thanks for mentioning this.

  8. David January 25, 2011 at 11:51 AM #

    I started using mint last year around February and was really excited by all the great tools it had, but I was shocked by something that I recently discovered. I was using my receipts to categorize my charges and realized that mint wasn’t downloading all my transactions from my accounts. Specifically, it missed 5 to 10 transactions from my American Express card statement. I’m in the position now, where I thought we were saving all this money, but actually we were not. Mint says they know about the problem and have people working on it, but it made me think twice about trusting this company.

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