In my first article on budgeting, Make Your Budget Fun Again By Conserving Your Precious Willpower, I explored why most people dislike budgeting: they are often trying to control an unpredictable future. This approach is exhausting and drains the limited willpower we are meant to conserve. A better method is to focus primarily on tracking your income and expenses—observing your present situation—which can be done with consistent success and requires very little willpower once it becomes a habit. Tracking serves as a guiding light, helping you navigate unexpected twists in your financial journey with greater ease.
Once you have made tracking a regular habit, you’ll gain the critical information needed to plan the next month’s budget. A budget is simply a plan to spend less than you earn. While this sounds straightforward, it often falls apart in practice. For instance, a carefully balanced budget can be completely upended by a spending spree where you ended up spending far more than you expected.
Your Out-of-Control Slush Fund Budget
One way to improve the budgeting process is to get better at naming and claiming new money. When a paycheck or unexpected income gets deposited into your account and remains unnamed or unclaimed, it often defaults to being a “slush fund” or “free money.” This pile of unallocated funds becomes fair game for impulsive spending. Studies show that people are less price-sensitive (i.e., more willing to overspend) when they view money as “free” or undesignated.
Take, for example, the extra cash stipends provided during the COVID-19 pandemic. I received an unexpected $2,000, which I allowed to sit in my checking account without a purpose. What happened next was predictable: I squandered it. I spent more than usual at restaurants, bought a jacket I didn’t need, and indulged in other unnecessary purchases. Without proactive planning, the money turned into a slush fund—and, as expected, it got wasted. The key takeaway? Assign every dollar a purpose as soon as it arrives. Naming and claiming your money ensures it works for you instead of disappearing into thoughtless spending.
Using Digital Envelopes To Name It And Claim It
Rather than letting new money simply sit in your checking or savings account, it’s essential to name and claim it immediately. This means assigning your money to specific categories using digital envelopes. A digital envelope is a way to partition a lump sum into designated spending categories. Many budgeting apps make this process simple and efficient.
For instance, if you have $5,000 in your checking account, connect it to a budgeting app and assign the amount to various digital envelopes. For example:
- $500 for groceries
- $2,000 for rent
- $1,000 for utilities
- $1,500 for health expenses
As you spend money, you designate which envelope to draw from and monitor your spending habits regularly. (For tips on maintaining this habit, see my article: Make Your Budget Fun Again by Conserving Your Precious Willpower.)
Reflecting on the unexpected $2,000 I received during the COVID-19 pandemic, I should have immediately evaluated my priorities and assigned the funds thoughtfully. With any new money, you always have three main options: spend, save, or give. Here’s how I could have used that $2,000:
- Be generous: Donate to a local homeless shelter.
- Save: Contribute to my Roth IRA.
- Spend with purpose: Complete a home improvement project, like painting the living room.
All of these would have been meaningful uses of the money. The key is to avoid letting your money sit idle and turn into a nameless slush fund. By naming and claiming your money, you can ensure it works toward your goals and values.
Be Specific In Your Budget
Let’s revisit the $2,000 I received unexpectedly. If I had simply put it into an envelope labeled “Savings,” I would have set myself up for trouble. A generic label like “Savings” is just another way of calling it a “slush fund.” For instance, if I were shopping online and saw a portable speaker that I liked, I could easily justify using the money in my “Savings” envelope. Why? Because it lacks a clear purpose, and the impulse to spend can feel like a valid “purpose” in the moment.
To avoid this, make sure your digital envelope names are as specific as possible. When an envelope is named meaningfully, you’ll naturally be more protective of the money inside it, making it harder to justify dipping into it for unrelated expenses.
For example, if I wanted to use the $2,000 for a home improvement project, simply naming the envelope “Home” wouldn’t cut it. A vague label like “Home” isn’t compelling or clear enough to deter me from spending the money elsewhere—say, on a new pair of shoes—because it doesn’t feel tied to a concrete goal.
Instead, naming the envelope something like “New Paint to Make Wife Happy” would be much more effective. If I love my wife and know that painting the living room would bring her joy, I’d be far less likely to invade that envelope for frivolous purchases.
Here are more examples of how specific, meaningful naming can help protect your money:
- Instead of “Vacations,” name it “Surf and Sun in Hawaii.”
- Instead of “Health,” break it into specific needs like “Kids’ Braces,” “Eye Wear,” or “Doctor Visits.”
When your envelopes are named with purpose and emotional weight, they become powerful tools for keeping your spending aligned with your priorities and values.
Endowment Theory And Budgets
Never underestimate the power of giving detailed names to your digital envelopes. Doing so taps into a psychological phenomenon known as endowment theory. This theory suggests that people tend to protect and value anything they feel ownership over—anything they consider part of their “endowment.”
If money sits in your account as faceless cash, it feels distant and impersonal, making it easier to squander. However, when you allocate that money into digital envelopes with specific names tied to your hopes and values, you claim ownership of it. As a result, you see that money as part of your endowment and instinctively work harder to protect it.
In summary, the next time you receive a paycheck, tax refund, or unexpected windfall, don’t let it become an unclaimed slush fund. Instead:
- Name it and claim it. Decide in advance how you want to use the money.
- Allocate it to specific digital envelopes using a budgeting app.
- Name your envelopes thoughtfully and specifically. The more connected the names are to your values and goals, the less likely you are to divert those funds for other purposes.
By taking these steps, you’ll naturally exercise more self-control and align your money with your personal priorities.