How to Choose the Right Budget Strategy —

Envelope Plan vs. Zero-Based Plan

Whether you’re just starting to budget or have been at it a long time, it’s important to find a plan that works well for you. Much of budgeting is psychological, so it can help to have visual reminders of your spending and saving. Some people enjoy tracking their every cent and like to create spreadsheets and other valuable documents that help show that. Some people like to organize their budget into general categories and have automation take over the rest. It’s all about how you learn and function best. Even if you’ve been budgeting a long time, you may not be doing it as effectively as you could if you were using a different plan. It's good to check in every once in a while to see if you’re truly hitting your financial goals.

Now, if you follow this blog regularly, you’ll know that we’ve already talked about the 50/30/20 budget plan in depth in an earlier blog post. This plan is pretty popular, but it’s not the only option for those hoping to create and stick to a budget. Over the next few months, I hope to help you choose the budget plan for you by breaking down some of the most common options and their pros and cons. Continue reading below to learn about the first two options: the envelope plan vs. the zero-based plan.

What is the Envelope Plan?

Many of you have probably already heard of this plan. It’s often recommended by financial experts like Dave Ramsey and is one of the easiest and most visual ways to understand exactly where your money is going. If you have problems overspending each month and tend to just pull out your card for every purchase, this could be the perfect plan for you. Many visual learners have found success with this plan because when you see all of your money in front of you, divided into clearly labeled envelopes, you can see exactly where the money goes and stop yourself from overspending.

How Do I Create an Envelope Budget?

Like with every other budget plan, you start by figuring out where your money needs to go each month between bills, groceries, gas, and fun activities. Then, once those totals have been decided, you take the money out of your account that you will use for the month and separate it into envelopes that are labeled for each section of your budget. You want to be sure that these envelopes are very specifically labeled so that you don’t use money intended for bills to buy dinner one night.

After you’ve labeled everything, you keep those envelopes in your wallet with the amount you’ve previously decided on. Once that money is used up, that’s the end of your spending for that category that month.

This strategy can take some trial and error at first when you find yourself with an empty envelope and you haven’t even made it halfway through the month. However, after a few months you’ll find it’s easy to stick to your plan. If you want to make sure you don’t cheat and use your checkbook or credit/debit cards every time you go out, make sure they’re removed from your purse or wallet to reduce temptation. You also want to make sure you don’t carry a lot of small bills in your envelopes, as you are more likely to spend those while you’re out and about. Studies have shown that shoppers hesitate more if they need to break a big bill. (However, when carrying big bills, be sure to keep an extra careful eye on your wallet and don’t carry too much money at once in case of robbery).

To make sure that nothing happens to your perfectly crafted budget while you’re home, make sure that the envelopes are stored in a safe place like a locked drawer or safe so that your kids or guests in your home can’t easily find the money and use it for themselves. It may help to keep your credit/debit cards in the same place as your envelopes to avoid the temptation of online shopping.

Pros of the Envelope Plan

You have to sit down and plan all of your spending for the month before it even begins so you have the time to avoid costly surprises later in the month.
Once you look at your finances, you will start to see patterns in spending and discover where you’re struggling the most so that you can correct it.
It will be easier to set limits on your spending, especially with things you want vs. need when you only have a set amount of cash to work with each month. If you notice you’ve been spending a lot of money on eating out or getting drinks with friends before implementing this budget plan, you’ll find that the envelope will prevent you from splurging while you’re out.
Helps you save. If you only have the money in the envelope to work with, you won’t be worrying about charging your card and then adding up your purchases later. You’ll see the effects of your buying in real time as your envelope gets thinner. Studies also show that the typical American shopper will spend 15-30% less when they’re using cash vs. plastic.
You can avoid credit card debt and also avoid overdraft fees when you don’t use your cards.

Cons of the Envelope Plan

With the increasing push to pay bills online or with checks, the ease of contactless payments, and with many companies choosing to eliminate cash payment options altogether because of the pandemic, it may be hard to use the envelope plan in your day-to-day life. You may have to split your payments between online tracking and cash when you can.
If you are intent on building up your credit, you will have to compromise between continuing to use your credit card for essential purchases and cash for the rest. This could make it easier to fall back into your old spending habits when you have access to your credit card more often.
You have to carry physical envelopes with cash inside. This could be dangerous when you’re traveling between locations, especially if you take public transportation. It can also be incredibly bulky depending on how much money you have to carry at any given time, which makes it easier to lose as you go about your day. Make sure you keep the money in a secure place, as it can’t be recovered once lost.
You have to invest a significant amount of time in preparing your envelope budget, getting the money out of the bank, and then separating it into envelopes each and every month.
If you’re budgeting with a partner or spouse, it can be difficult to figure out how to share the envelope strategy. What if you both choose to buy something in the same category on the same day? Sometimes there’s one person in your family that does all the shopping, so it may be easier to give them a majority of the money for groceries and then keep only a little for yourself, but it will take some planning and time to figure out the best split.
It can be easy to run out of money before the month ends. If you do not budget properly for the first couple of months or unexpected expenses come up, it can feel nearly impossible to stick to the envelope budget. You have to be seriously realistic with yourself and your budget needs. This can be especially difficult if this is the first time you’ve ever made a budget.

Now that we’ve learned about the envelope plan, let’s compare it to zero-based, another popular budgeting option.

What is the Zero-Based Plan?

Unlike the envelope plan, the zero-based plan is made and completed almost entirely online. If you are struggling with a lot of debt and need to focus on eliminating it quickly, this could help you focus. If you like crunching numbers and organizing spreadsheets, this budget plan may also work better for you.

The zero-based plan, created by Peter Phyrr in the 1970s, essentially involves breaking down your income each month into all your spending and saving categories until you reach zero. This doesn’t mean you’re spending all of this money each month; it just means every cent has its place and is accounted for. This could help you if you happen to have a lot of unexpected expenses pop up every few months. With the zero-based plan, you would have already budgeted for it and won’t have to worry about dipping into your savings or going into more debt.

How Do I Create a Zero-Based Budget?

Just like any standard budget, you first have to add up all of your take home income, so you know what you’re working with. Then you have to add up your expenses for the month, including bills, rent, loan payments, etc. After that, factor in your savings goals, optional expenses, and irregular costs like gifts, car maintenance, and more.
After all expenses have been accounted for, you then budget everything down to zero. I recommend documenting all of the items with specific payment amounts first so that you ensure you have the money to make the full payment on those each month. Then factor down to the least important, optional expenses. This way it will be easier to readjust your budget if needed.
As you go throughout the month, you’ll want to keep track of all your expenses to make sure that you’re still sticking to your goals. There are plenty of apps you can use to make this part as easy as possible. Try a few out to see which one works best for you, or make your own spreadsheet if you would rather do it that way.

What are the Pros of a Zero-Based Budget?

A zero-based budget is more flexible than the traditional envelope plan. You can easily prevent yourself from overspending by moving money from one category to another, whereas with the envelope plan, if you run out of money in your envelopes, you’re out of luck.
This plan is proactive for you instead of reactive. You are forced to lay out your entire budget at the beginning of the month transaction by transaction instead of guessing the amounts you may or may not need for each category. You’re able to track your expenses as you go and adjust when you need to, instead of just spending and dealing with the consequences later.
The plan helps you understand where your money goes. If you’ve never kept track of your money and how you spend it each month, this could really help you see what you need to adjust in the long run to meet your financial goals.

What are the Cons of a Zero-Based Budget?

This plan is time-consuming. Unless you have utilized a budgeting app to help follow your purchases and finances, you will have to manually follow every transaction on a daily or weekly basis, depending on how often you spend money.
You may not get instant gratification with this budgeting plan. With other budget plans, it’s easy to see the benefits and direct your money immediately. With the zero-based budget plan, you can miss irregular expenses which put a dent in your monthly budget and can discourage you from using this particular plan. (However, many people are happy they stuck with this plan in the long run as it significantly lowered their debt in less time than they thought).
If you have an unpredictable income, this budget plan can be really hard to execute and maintain. You may be better off with the envelope budget plan in this case.

Which Budget Plan is Best?

Now that you’ve learned a little bit more about some common budget plans, you’re probably wondering which one is the best for you. The answer to this question isn’t so simple. Every person learns and functions differently. Some are good at math and budgeting, others are not. Some are visual learners, some do better with calculations in a spreadsheet. The best way to find the plan that’s right for you is to try one for a few months to see if you like it. If you find yourself struggling to stick to it, move on to another plan that takes a different approach. Still struggling to find a good fit? We’ve got plenty of resources available to help you succeed.

Have specific questions about your personal budgeting plans and goals? Give one of our experienced bankers a call today to get you started on your financial wellness journey!