The ballad of the flexible budget(Read article summary)
It's essential you allow yourself to be flexible with your budget, Hamm says. Recognizing that some portions of your budget (like mortgage payments) should be fixed while others (like food) change from month to month can save you from the stress of trying to stick to a rigid budget.
There are a lot of different techniques for budgeting out there. There’s the standard “write out a budget” method presented in a ton of personal finance books. There’s the “envelope” method. There’s the electronic “You Need a Budget” method.
I’m not going to get into the ins and outs of each type of budget, except to say that they have a few big things in common.
The big one is that they all push you to compartmentalize your money into groups so that you can keep careful track of where your money is going.
They want you to allot a certain amount to your energy bill. They want you to allocate a certain amount to your monthly food spending. They want you to allocate a certain amount to your mortgage. You get the idea.
The idea behind this is that you should strive to set aside enough each month to ensure that each particular area of your life is covered. So, if you have a $1,200 mortgage payment each month, then $1,200 of your monthly income should be untouchable except for your mortgage payment. If you spend $800 on your family’s food each month, then $800 of your monthly income should be untouchable except for food.
Budgeting really does make a lot of sense. Except when it doesn’t.
See, while some of your budgetary items are extremely fixed – like your mortgage payment – others are not. Your food spending varies depending on whether you run out of staples, whether you have guests, and many other factors. Your energy spending varies depending upon the season. Your entertainment and hobby spending can vary a lot depending on your social calendar.
Most budgeting advice encourages you to assess this number based on your recent spending. They’ll tell you to take your food receipts for the last month, trim them by 10% or so, and use that as your food budget for the month. They’ll tell you to look at your last few energy bills, average them, and use that for your energy budget.
This doesn’t work.
You’re going to have a month where it’s freezing outside and you use a ton of energy. You’re going to have a month where family members invade like locusts and your food budget goes to the moon. You’re going to have a month where you end up making too many phone calls and your cell phone budget is too low.
You absolutely must have flexibility in your budget. A rigid budget doesn’t reflect real life.
I’ve been experimenting with budgets for our family recently, and I’ve found that my best solution to the flexible budget problem is really simple.
All I do is add a new line item to my budget called “Flex.” That “Flex” section is equal to 10% of the rest of my entire budget. So, if all of my other budget line items add up to $3,000, the “flex” item is $300.
The entire purpose of that “flex” section is to make sure that, if I go overboard on a particular budget area for a good reason, it’s not panic time. The “flex” section will pick it up.
At the end of a month, if I still have money in the “flex” section, I carry it forward to the next month. I also dump any extra money from other budget categories into “flex” for the next month.
If “flex” ever totals more than 25% of my budget, I use the extra for saving for a big long-term goal, like our next house. Alternately, you could use it for additional hobby or entertainment spending that month. So far, it’s gotten close to 25%, but it’s never quite made it.
On the other hand, “flex” has made it a lot easier to stick to a strict budget. I know that if I go over a little bit on food spending one month, it’s not a panic situation. Instead, I know that “flex” will cover it.
It’s vital to note, however, that any time you do go over in a category, you should spend some time reassessing that category. Should you be budgeting more there? Or was this a rare exception for a good reason that won’t regularly be repeated?
If you’re struggling with budgeting, adding “flex” to your budget can make the whole process much easier. It might put a little squeeze on some of the more “fun” areas of your budget, like hobby and entertainment spending, but your reward for that is a lot less stress and a lot more flexibility.