This is part 2 in a series on the envelope system of budgeting, and how to use it in Quicken. Have you read part one yet?
This is a pretty long post, but it's crazy-informative. Also, there are pictures! The pictures are small, so click to enlarge.
Background
If you've ever tried to use Quicken's budgeting feature, you know it leaves a lot to be desired. Its system is purely reactive, meaning you spend and spend all month (or year) and then at the end of the month (or year) you look to see how you've done and cross your fingers. Of course, they let you check on your progress, but it's still not as structured or informative as envelopes.
The Bare Bones Basics
It seems that nobody is aware that you can use the envelope system with Quicken. I think this method is my own invention, because I don't believe Quicken even intended to have this feature - it just turns out that we can take advantage of a small functionality Quicken does offer: entering income as negative expenses. Allow me to explain.
Quicken allows you to setup and manage a list of expense categories. When you enter expenses for your accounts you classify each expense into one or more categories. These categories are our envelopes. By default, Quicken expects you to classify expenses into expense categories (like "groceries" or "vacation") and income into income categories (like "salary" or "bonus"). This is wrong - doing this would stuff our income envelopes and put our expense envelopes seriously in the hole. The key is to record your income into your expense categories instead. That's it. If you crave the details, read on.
Deciding on Envelope Deposit Amounts (one-time step)
The first thing you need to do is determine how much you need in each envelope per paycheck. You only have to do this once, and update occasionally. First we'll put it in terms of months. For yearly expenses such as insurance, divide by 12. For irregular and unexpected expenses, guess how much you may need on average each month - I recommend guessing high and once you've saved up enough, start routing these monthly funds to your retirement accounts. Also include savings envelopes such as a house down payment, and buying a car. To get your mind started on envelope ideas, consult this list.
Now we just figure out how much to put in each envelope per paycheck. It's an easy calculation. If you're paid monthly, use the above numbers. If you're paid twice per month (or every 2 weeks), divide by two. Easy as pie. You can use the Excel template I made by clicking on the above image and downloading the file.
Creating your Quicken Envelopes (one-time step)
Now we'll enter these envelopes into Quicken (remember that Quicken calls them categories). In Quicken, click the "Finance" menu and select "Category & Transfer List". Some categories will already be there so delete the ones you don't need, and add in the missing ones. You only have to do this one time, ever!
Also, you can classify your categories into groups, which serves no purpose whatsoever except to make your budget report more organized. You can assign categories to groups later, so you don't have to decide now. I have the following groups: "Fixed" where I spend an exact amount (rent, tithing, cell phone, insurance), "Fluid" where expenses fluctuate (gas, groceries, recreation), and "Savings" (vacation, car, house).
Maintaining the Envelopes (recurring steps)
To maintain your envelopes, just assign your expenses (and income) to categories as you're entering in your transactions. You may already enter all your transactions, so this isn't any more difficult than what you already do. I recommend doing this each week - it's quicker and your budget report is more up to date.
As you're recording expenses, enter the amount in the "payment" field, and then simply select the appropriate category from the drop-down list. You can also split a transaction between a few different categories (extremely useful) by clicking the "Split" button in the drop-down list. So if you go to Walmart and spend $50 on groceries and $30 on Miscellaneous, you don't need to enter 2 separate transactions.
As you're recording income, enter your paycheck amount in the "deposit" field, and then click that "Split" button. Here's where we divide up your income into the envelopes - have that list of amounts handy. Go down the list allocating funds to the envelopes: Rent ($300), Groceries ($80), Auto Insurance ($50), etc. When you're all finished, you might have some left over. You can create a category where you temporarily keep the money that's headed for your IRA and put the leftovers there, until you "spend" it.
You only need to go through this lengthy income split process one time. Every time afterward, you can just duplicate your last paycheck: right-click on a past income transaction and click "copy", then right-click on the blank row at the bottom of the register and click "paste". If necessary, you can make modifications, like if you see you're not allocating enough for groceries and want to up it.
Creating your Budget Report (one-time step)
So now we've entered in some income, and entered in some expenses. How much do we have in each envelope now? We view our Budget report - but first we have to create it. You only have to create it once, and then we'll save it!
Go to the Reports->Spending menu and click on "Cash Flow". The report shown is close to what we want but it's in a sort of backward format - positive envelope balances show as negative. Right-click in the report area and click "Customize". At the bottom of the new window, change the Organization drop-down to "Category Group". Now click "Create Report". The resulting report is exactly what we want! To save it so you don't have to create it ever again, right click in the report area, click "Memorize", and call it "Budget". All done!
Viewing your Budget Report
To see your budget all you have to do is go to the "Reports"->"Memorized Reports & Graphs" menu and click "Budget". Here's all your envelope balances, at the tip of your fingers! We see that we have $50 in our Insurance envelope, but negative $10 in our groceries envelope. That's OK, we'll make up for it by spending less next month.
If you ever add new categories, which does happen, then you'll get a message saying that new categories have been added. Just re-memorize the report, writing over the old one, and you won't see the message again.
Wrapping Things Up
I wrote this post assuming that you haven't necessarily used Quicken before and so I mentioned the basics. But I'm also assuming you can poke around and tweak things to your liking. Now that you've set it up, all you have to do is enter your transactions like usual. Total maintenance time: about 20 minutes per week.
Now this was a long post, but if you made it through then you learned a valuable technique for budgeting in Quicken. If you have any questions about the instructions, please leave a comment and I'll respond soon. Come back later for the conclusion of the series: some tips to make your envelope budgeting more robust and save you money.
