I use a spreadsheet version of the envelope system for my budgeting. Each month I devide my income between 23 different catagories. Some of these catagories don't get used very often. The home-owners insurance envelope for example gets $100 per month and pays out $1200 per year.

When added up all of the different catagories total between $6000 and $9000. I have an income of about $40K per year and my total endebtedness is about $115k including my house. My goal is to be debt free.

I feel like I have too much money sitting in the bank that could be paying down debt, but it feels so nice to know I have money in the bank waiting for every bill and expense that comes along. How do I get the best of both?

your feeling may be right but there is no reason to adjust because frankly cutting it to tight will hurt you in case of unexpected events

__________________

You dont

Debt isnt a problem unless the cost is unreasonable. Life isnt constant it has its ups and downs, best to have a sizable cash on hand to handle the downs, otherwise you may pay off debt that costs you 5% (a motgage) now only to borrow on your credit cards in a pinch in the futurre at 15%