I’m a huge advocate of envelope budgeting. It’s a time-tested method at making sure you don’t spend more than you have. But envelope budgeting is more than that; it’s also a practical and philosophical money management strategy. It forces you to look at the money you have right now and decide how you should spend it, or importantly, save it. But sometimes it’s easy to get a little lost and over complicate your envelope budget with the accounts you have in real life, like your checking, savings and credit card accounts. When this happens you can end up putting your cash, sometimes pretty significant amounts, in low, or even zero interest accounts. For number geeks like us, that is no good, you always want your money working for you, no matter what type of budgeting method you implement.
Here’s an example how people commonly get tripped up when using an envelope budget with transfers. Many people have learned that one of the best ways to save money is to transfer money to your savings account directly from your paycheck. The idea being, if you never “see it” you can’t spend it. This is a good strategy, but I’ll be honest, it kinda defeats the purpose of envelope budgeting. With envelope budgeting every dollar is supposed to be a part of the plan. Is the money you automatically transfer to your savings for an emergency fund, or are you saving for vacation or will you just use it later in the month to cover rent or groceries?
Here’s another example: are you one of those people that transfers extra money to your savings account when you think you can afford it, but then inevitably transfer some of it back to your checking account when it is time to pay a larger than expected credit card balance? Or maybe you have three different savings accounts and you transfer money to different savings accounts for different things, like one is for vacation, another is for your emergency fund and the third for miscellaneous expenses. Doing all of those transfers gets confusing and again, in the framework of envelope budgeting, what are those transfers for, and to which part of your plan and priorities do they belong?
With envelope budgeting we actually completely decouple your budget from your real-life accounts (checking, savings, credit cards, etc.) If you want to put money aside for an emergency fund (and you should being doing this) you’ll want to have an envelope called “emergency fund.” If you are saving for a vacation, have an envelope for it. How fine-grained you want to get with your envelope categories is a personal choice. I do see that people that try to get too detailed end up shuffling money between envelopes very frequently and I’m not sure it gives them a better sense of their finances at the end of the day. So I’d say it is good to have an envelope for “Vacation,” but I’m not sure you want one for “Trip in 3 weeks to visit dad” and another for “Summer trip to Yellowstone” and yet another for “Weekend getaway to the coast” – that level of detail is probably too much for most of us.
With envelope budgeting, the actual dollars saved for each of those categories can be in any of your real-life accounts. There could be $500 in your checking and $250 in your savings, what matters is that you have $750 in the envelope. This is what I mean by decoupling your budget from the amount in your accounts. When you fully embrace envelope budgeting, you only ever need to look at your account balances when paying a large bill from one of the accounts. For the day-in and day-out management of your finances, you only need to look at your envelope balances. They tell you what you can and cannot spend, or what you have saved.
Opportunities to Save
But there is an opportunity here. Many people have a high-interest savings account, like from Ally. If you don’t have one you might want to consider opening one (and no, we don’t get a kickback from Ally for recommending them). If you have a large amount of cash you’re saving in your envelopes, it makes sense to maximize your use of one of these accounts for the cash you won’t need immediately. Even if at the time of writing these “high interest” savings account are only yielding about 1.5%, it is still free money you should be taking advantage of. It can help with the fight against inflation too.
Here is an example. Let’s say you have $10,000 saved up for your emergency fund and every month you are putting money into an envelope to cover your property taxes, which you pay once a year. For this example, let’s say your property taxes are $5,000 a year. If we just used the savings account for the emergency fund it would have a balance of $10,000. But if we also keep the money that we are saving for property taxes in the savings account then it can have up to $15,000 in it. If you apply this same strategy with the money you are saving for your vacation, new car fund, or whatever, then you can really make that cash work for you.
Let’s work some numbers for a scenario like this. We will assume you’ll keep money in your high interest savings account for just one year and we will assume the interest rate won’t change from 1.5%.
Just Emergency Fund Example
If you maintain a balance just based on your emergency fund of $10,000 then after a year you’ll have earned a $150, not bad. It’s $150 you wouldn’t have had otherwise if you left it in a non-interest earning account.
Emergency Fund + Property Taxes Example
If you maintain an average balance of $12,500 over the course of a year (we are simplifying this since you will be contributing money monthly, then paying your property taxes once a year and effectively bringing the account balance back down to your base starting point) you’ll end up making a $188 in interest. This is a 25% increase (because $12,500 is 25% more than $10,000). Without doing so much as a few mouse clicks to put some of my less used envelope balances into a high-interest savings account I get an extra $188 a year.
My guess is that some savvy readers are wondering, is there something else we could do with the cash that might earn more than a paltry 1.5%? What about bonds or even invest it in an index fund? Best practice is to not put money into the market if you think you might need that money in the next five years. So that pretty much rules out all of the things I’m saving for on a monthly basis. I only put money into the market when I know I can leave it there for a long time.
Envelope budgeting is about having a plan for the money you have right now and prioritizing how you want to spend your money. But that doesn’t mean you can’t take advantage of high interest savings accounts to keep that cash working for you. To make sure I’m taking full advantage of my high-interest savings account, every month I review my envelope balances and my account balances and decide how much I can transfer over to the savings account. When I end up having to pay a big bill, like property taxes, I move the money from the savings account to the checking account and pay the bill. This keeps my cash working for me while keeping it easily accessible. And I don’t know about you, but I’ll take any extra bit earned on interest because it’s less I have to save to take that next vacation, whether it’s to Yellowstone or the coast.
16 comments on “Making the Most of a High Interest Savings Account With Your Envelope Budget”
Thanks Ian – great article. You prompted me to open up an HISA – I did it this morning!
The article has a typo – it says that, “$12,500 is 25% more than $1,000.”
Good find, fixed it!
One thing you could propose is using 3, 6, 9 or 12 month CDs for some of the money in your high interest account. These typically pay more than a liquid high-yield money market. if you ladder them you’ll have access to funds quickly when you need them and earn even a bit more on your money.
Ian, one thing I’ve discovered about envelope budgeting that doesn’t make sense to me is the totals in the envelopes can exceed the amounts in the accounts associated with the budget. For example I just added a billion dollars to my groceries envelop, and I can assure you that money doesn’t exist in my accounts. The result of this is that it is incumbent on me to manually audit the totals of my accounts to the envelope balances to make sure they represent reality.
When starting the budget the first time I am presented with the starting cash to distribute, but after that if I edit the budget or adjust cash, the information is up to me to calculate manually. Fill envelopes only shows the total income to distribute if there is any.
I love the feature in general, but am surprised I need to manually keep track that the envelopes total doesn’t exceed the accounts they are connected to.
Thanks for writing Paul. The best practice is to NEVER use Adjust Envelope – it is really only there to make an adjustment because you didn’t track some other part of your finances. It is only used to make corrections to errors. If you always move envelope to envelope it should always be accurate.
Thanks Ian. I’m starting to make it work. The workaround I’m doing is to put ALL the available funds in the accounts into one envelope when creating the budget and then later distribute to the other envelopes as I add them.. That way I don’t need to manually add up my accounts and compare that to the total in envelopes. I still think it would be good to somehow cap the total available for envelopes by the total in the associated accounts to avoid the possibility of the envelopes saying there is more money than there really is
What’s the secret to using envelope budgeting when transferring between accounts? For example, I transfer money monthly from my savings into a 529 account for my kids college. I can’t seem to get this to show up in my budget…it sets it up as a scheduled transaction, but does not appear in my budgeted items list, therefore not providing me an envelope to put money into. Any thoughts or work arounds?
I’m having the same problem, where the envelope total is more than the actual money in my bank accounts. I’m a new user. This discrepancy could cost me thousands of dollars in interest and penalties if I were to actually spend the money in the envelopes. But now that I’ve spotted the problem, how do I fix it? How on earth does Banktivity calculate the total money available for the envelopes, if it’s not coming from the account balances or this month’s paycheck? Your support articles are seriously lacking.
This video walks you through setting up an envelope budget: https://www.youtube.com/watch?v=v4baMpqn7AM
That being said, the initial amount in your envelope budget is based on the total of the accounts that you have included in the budget. Then when you get paid, that money becomes available to distribute.
But Ian, the problem is if you set up your new envelope budget when your credit card balances happen to be in the positive (like after you made a payment, and I pay my balances in full every month), then that positive balance seems to be added to your envelope total. I’ve tried excluding the accounts to leave that out of the income total, but then the actual spent is not accurate. When I add the credit card accounts back in, then my actual spent is correct, but the total envelope money to spend is over. I can not figure out how to correct this. At least that appears to be what is happening. I have turned my envelopes on and off several times trying different things to get the number to be accurate, but do I just have to wait until my credit card balances are negative before I turn this feature on? What happens when they go positive again? Will my envelope total get off again?
It isn’t very common for a credit car balance to be positive. Even if you pay in full every month, I’d expect the balance to be zero until you purchase something on it. Regardless, if you have truly have a positive envelope balance, that is, you have paid off your credit card and sum, then that extra you put on the credit card should just be treated like cash to distribute.
Here is an example, let’s say I have -1000 credit card balance, but I pay 1500 on it, so my final balance is +500. Let’s also assume I have one other account, a checking account with a balance of 2000. When I go to set up an envelope budget, I would have 2500 to initially distribute to my envelopes.
I hope this helps!
I am coming from Quicken, and find Banktivity very appealing. In my Quicken setup, I used an AppleScript to create an envelope system in Numbers. At the beginning of the year, I would calculate how much money I needed to distribute into my envelopes each month to cover big expenses throughout the year. For example, I pay $800 bi-annually to auto insurance. I distribute $135 each month into my Auto Insurance envelope. By the time my bill comes due, I have earmarked enough funds to ensure that I can cover the bill. I’m trying to translate this to Banktivity. I could setup my budget to reflect that I have a $800 bill to pay bi-annually, but that doesn’t ensure that I am putting $135 away each month to cover the bill. I could setup the budget to accumulate $135 each month ($135, $270, $405, …) but that would mean I would be budgeting more than I make during months 2-6 and 8-12. What recommendations do you have?
Our recommendation would be to set up an envelope budget and enter a scheduled transaction that occurs every 6 months and the screen in Banktivity 7 will show the target amount for each month. This is only a feature in Banktivity 7.
I have the same issue as Joseph, but with unscheduled expenses like for example car repair, which can occur any day of the year. I know that I have an average of $600 every year. I would like to set aside money in order that when I have the repair I have the money for it.
Ideally I would like to have each month a target value that I should have in my envelope.
The way it is done now is that I have a monthly budget of $50 per month. So in Jan I should put $50 in the envelope, in Feb, $50 more (so that I have $100) and so on. Probably I would also like to have a cap so that if I have more than a certain amount I stop saving for that.
The problem is that I don’t know wether I should add money or If it was already added for the month. If I look at the envelope I only see that total amount added. This gets more complicated if I don’t add the total amount one month (beaches I preferred to allocate the money to another envelope). How do I know afterwards that I have to put more than $50 to the envelope to catch up to my initial goal of putting aside $50 monthly.
What would be the best way do deal with such issues?
If you make sure you are using the latest version of Banktivity we now offer a “target” amount each envelope should have based on upcoming bills or unscheduled expenses that aren’t distributed evenly across the year. The target amount indicates how much you should have in the envelope for the current month to make sure you can cover your expected future expenditures.