Three Creative Budget Ideas: Waterfalls, Envelopes, and Nicknamed Checking Accounts

By Mike Peterson
In August 20, 2013

Budgeting isn’t for everyone. 

Yes, you read that right.  But let me explain.  What I really mean is, the standard budget – as in, the fussy, spreadsheet-style, track-every-penny type of budget – doesn’t work for everyone.  Fortunately, there are several budget options out there, and I try to make a point to keep up with the latest money-management and debt-repayment strategies. 

Whether your money management plan is focused on building up an emergency fund, paying down high-interest credit card debt, or saving up for a large purchase (like a vacation or a new washer and dryer), there’s a savings and budget plan that’s right for you. 

Here are three budget ideas that will help you save money and spend wisely – no spreadsheets required!

The “Waterfall” Budget:  Flowing from Debt Repayment to Savings

Perhaps you’ve heard of the “waterfall” method of debt reduction – it’s similar to the “snowball method” in that it encourages you to focus on paying one debt at a time (typically the debt with the highest interest rate). 

As a debt repayment method, the waterfall method basically works like this: You pay as much as you can toward the credit card with the highest interest rate and make the minimum payments on your other debts.  Once the card with the highest interest rate has been paid off, you take the money you were that card and roll it over to the card with the next-highest interest rate (which is why this method is also sometimes called the “rollover method”).

I recently came across a blog that suggested using a modified “waterfall” strategy as a savings and budgeting method, and I thought it was pretty good idea.   And, it’s pretty simple, too:  You break your budget into three categories:  debt repayment; fixed monthly expenses like rent, utilities, and transportation; and “other” — which can include things like clothing, entertainment, restaurant meals, fancy grocery store purchases.  Once you figure out how much money you need to set aside each month for each of these categories, you set up a separate checking account for each category and split up your paycheck so that it flows from the “debt repayment” category down to the “other” category, getting smaller as it goes. 

You can use banking features like monthly or weekly transfers to split up your money automatically – and if your bank offers free bill pay, you can automate your bills, too – so you never have to worry about remembering when your electric bill is due. The result?  A fully-automated banking system that focuses on debt repayment — and leaves you a little bit of money at the end for extra purchases.

One of my favorite parts of this method is that the “debt repayment” category can be converted into a savings account or emergency fund once all of your credit card debt is paid off! 

The Envelope System:  A Cash-Based, Hands-On Budget Option

The envelope system has been around in various forms for a while, and although it’s not as high-tech as the waterfall system, it’s still a great, simple way to manage your money and curb your spending.

Like the waterfall system, the envelope system is based around general categories:  Debt repayment and savings; fixed bills and living expenses; and miscellaneous items like entertainment, clothing, and small extras. 

The envelope system basically works like this:  You take an envelope and label each one “debt,” “savings,” “bills,” and “other” – and then you fill each envelope with enough cash to cover each category for a set amount of time, whether you prefer budgeting for the month, the week, or some other set period of time.

The catch?  Once the envelope is empty, it’s empty.  So, if you use up all of the money in your “other” envelope on a nice dinner, a night out at the movies, or a box set of your favorite TV show on DVD, that’s fine – but you’ll have to do without until it’s time to refill your envelope.

If this cash-only strategy seems a little bit old-school, it is – but I think that’s a good thing.  Studies show that people tend to spend less when they use cash rather than credit cards or even debit cards.  So if you’re trying to wean yourself off of plastic, the envelope system might be just the thing for you.

Of course, you can always use a blended envelope system, too:  Use online banking to pay down debt and take care of rent, utilities, and other bills – and use envelopes for day-to-day purchases like gas, groceries, and fun extras.

Nicknamed Sub-Accounts:  Goal-Specific Savings

Have you ever had trouble saving up for big-ticket purchases or long-term goals (like college for the kids; a second honeymoon; or new living room furniture)? If so, a nicknamed sub-account can be the way to go. 

Many banks offer the option to open sub-accounts attached to your regular checking or savings account.  These sub-accounts can be nicknamed, too – so you can have a savings-account-within-a-savings account called, say, “Trip to Hawaii” or “New Leather Sofa.” 

A sub-account can be a great way to put extra money to a good use – and a nickname is a great way to keep yourself motivated to save.  Plus, giving your sub-account a nickname might just help you avoid raiding the account when you find yourself strapped for cash or tempted by an impulse buy.  It’s easy to take $20 out of your checking or savings account – but it might be harder to part with the cash if you know that you’re pulling funds from your family vacation fund.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

Click "More" for important American Credit Foundation client transition information