Getting Started: Annual and Irregular Envelopes

In an envelope budgeting system, Annual/Irregular envelopes are for expenses for which you save up over time. Examples include Christmas Gifts and Car Insurance.

When starting up, you’ll need a solution to get your Annual, Irregulars funded correctly. One clear way to do it is to set the initial balance of these envelopes so that you’ve already accumulated an appropriate amount in them. Here are a couple of examples:

Example 1: Christmas budget

  1. You’re starting EEBA in June and you have a Christmas Gifts Envelope with a $600 budget.
  2. Assuming you haven’t gotten your June paycheck yet and your December paycheck will be used for this year’s Christmas gifts, you have 7 months left (June through December, inclusive) left to save up for your Christmas gifts. Therefore, we’ll assume you’ve been saving 5 months already.
  3. The monthly amount for Christmas Gifts would have been $50 ($600 divided by 12).
  4. So start Christmas Gifts with a balance of $250 (5 months times $50).
  5. Then, fund the envelope using the normal monthly amount of $50 from June through December and you’ll have your $600 to spend.
  6. Adjust for your particulars. For example, if you usually do all your Christmas shopping in November, you only have 6 months left to save the total budget amount, so fund the starting balance of the envelope to have $300 in it.
  7. You can do this for any periodic payment, like Car Insurance, Property Tax. If there’s two payments, you can set these up as separate Envelopes, or fund it as in the second example

Example 2: Property Tax (2 payments)

  1. Your property tax is due in April and December in equal amounts of $1800 apiece, totaling $3600. This would require monthly funding of $300 ($150 for each payment).
  2. You’re starting with EEBA in June, again.
  3. Assuming you haven’t put your June paycheck in EEBA (and your property tax payments are being made after your April and December paychecks), this is how the calculation works:
  4. For December, you have 7 months left. You need to have already accumulated 5 months’ worth @ $150 / month = $750.
  5. For April, you have 11 months left. You need to have already accumulated 1 months’ worth @ $150 / month = $150.
  6. So, set your beginning balance in the Property Tax envelope to be $900.
  7. Then, by December, you will have 7 times $300 = 2100 + 900 = $3000 in your Envelope.
  8. You can take out $1800 December and have $1200 left. By the beginning of April, you have $2400 in the envelope—ready for your $1800 property tax payment with the correct amount accumulated for your next December payment, too.

You may wonder, in this instance, aren’t you leaving money in Envelopes that isn’t ”being used“?

Actually, in accounting lingo, something like Property Tax which you know will need to be paid within 12 months is called a ”current expense“. As such, you want to have cash on hand to do this and you will typically put these funds in a savings or money market account—accounts you can easily withdraw from—rather than less liquid accounts like stocks or bonds. So, you’re just being wise about having the money available that you’re going to need to spend within a year.