When Sarah and I first started our financial recovery, we tried out several different budgeting tactics.
We made up a very detailed budget in a spreadsheet. We split up our expenses into several different specific categories and then, whenever there was an expense, we noted which category it came from.
We tried an “envelope” system. We put aside money for different spending purposes into different physical locations, operating almost entirely from cash.
We tried a “notebook” system, where we kept a running tally of each of our expense categories, subtracting the amounts we spent from our budgeted total for the month.
No matter what system we tried, though, we always found ourselves running into the same problem. We would end up running over our budgeted amount on some particular category and that would end up eventually unraveling the whole thing.
For example, we might budget, say, $200 for our monthly energy bill, which would work for most of the year. Then we’d face a bitterly cold January and find ourselves with a much larger bill one month. (This eventually led us to trying out a cost-averaging plan, actually.)
We’d have a clear food bill, but then we’d have several out-of-town guests over a month and overshoot it significantly.
We’d have a child expenses bill, but then the cost of dance lessons or taekwondo lessons would come due.
Every time we’d think we had everything accounted for in our budget, we’d find out that we didn’t and our plan would just fall down. We’d have to hurriedly stop an automatic payment or quickly transfer money back from an automatic savings plan.
It was frustrating, to say the least. It felt like every good effort we made ended in failure.
There was one simple ingredient we were missing, though. Flexibility. That one little thing makes all the difference.
Implementing some flexibility into a budget is really, really simple. All you have to do is have another item in your budget – flex money. Assign an amount to that line item – a significant amount. I’d suggest that it be somewhere around 10% of your total budget.
If it makes it so that you’re not automatically saving money each month, that’s fine for now.
Then, keep track of your monthly budget as you normally would. Try to stay within the barriers you’ve set up for each section of your spending. Make yourself stay within your budget for non-essentials, such as entertainment.
However, sometimes life intervenes in an area that you don’t have control over. When that happens, transfer some money from your “flex” portion of your budget to the area that needs help. If you’re buying $40 of extra groceries because of guests, take that extra $40 out of the flex. If you’re paying for an extra taekwondo lesson for your child, move that $25 out of the flex.
At the end of the month, save any and all money that’s left in the “flex” portion of your budget. Use it for emergency fund building (speaking of e-funds, I like to think of “flex” money as a “soft” emergency fund) or for actual saving for a goal. Just put it to positive financial use.
Also, look at the expenses that came out of “flex” and ask yourself if that implies you need to make changes to your budget for the coming month. Is the expense that came out of “flex” trying to tell you something?
You’ll find that with “flex” in your budget, it’s much easier to develop and maintain an actual functional budget that works for you. It certainly works for us.