Budgeting can sound difficult, with lots of spreadsheets and number crunching. Maybe that’s why so many of us don’t make a personal budget.
According to the National Foundation for Credit Counseling, only two in five adults in America say they maintain a budget and track their spending. But, budgeting can be a beneficial tool, potentially making you less likely to overspend and more likely to save money.
There are a number of reasons sticking to a budget can be difficult. It might be due to inaccurate estimates or unrealistic spending limits. Or it could be because the budget is too rigid and overly complicated. This is where a flexible budget could help.
The important thing is to create a budget you can actually follow. That’s the purpose of a flexible budget: to give yourself enough flexibility you’ll actually be able to stick to your goals and spend your money on what you really want to spend your money on.
What is a Flexible Budget?
A personal budget is basically a budget for your life and personal expenses. Just like you’d have a budget for a business, you can make one for your life too.
A flexible budget is a personal budget that builds in room for adjustments. That means instead of setting very specific goals for each expense category, you have a broader overall spending target.
A spending target provides flexibility, because it doesn’t matter if you’re over or under budget by a few dollars in one category v. another category. A flexible budget looks at what you spend as a whole with both your discretionary income and your financial obligations.
A flexible budget can be as complicated or as simple as you want. If you build a budget with some flexibility in it, then you’ll also have more room to deal with any emergency expenses that come up.
And if you leave a little room for extra things here and there in your budget, then it might be easier to actually stick to it. A survey by Debt.com found that while 67% of people said they had some kind of budget, 22% feel that budgeting is too time-consuming to do. This where flexibility can help.
To make a flexible personal budget, you first want to look at your income and expenses, then allocate a rough range of money towards your various goals and spending categories, and plan ahead.
Building a Flexible Budget
If the purpose of a flexible budget is to help you organize your spending and achieve your financial goals, then simplicity is key. If you have too many spending categories, then you’re less likely to actually track all those categories and stick to your budget.
Likewise, a spending target could be easier to manage than a line item budget because it has room for flexibility built into it. With a spending target you have a set amount to spend per month and you then spend it however you please. Here are some tips for creating a better flexible budget.
A good first step to creating a flexible budget is to track your current spending. It’s hard to build any kind of a budget if you don’t know where your money is going in the first place.
When you track your current spending, you might spot areas where you’re spending more than you realized. You’ll also have a starting point to see how things change from here—and to plan savings into your flexible budget.
There are different ways to track spending. You can track it manually by gathering account information and going through last month or the past few month’s worth of expenses. Don’t forget one-time expenses that might not have occurred in the previous month, like annual insurance payments.
You could also consider a budgeting or personal spending app, like SoFi Relay, that allow you to easily track your bank accounts and credit cards. After a few months of tracking what you’re spending your money on, you should be able to see what categories your expenses are in—food, transportation, entertainment, etc.
Tracking Your Income
The other half of tracking where you’re at is to figure out how much income you really have to work with. This can also involve gathering up all your account and income information—bank accounts, Paypal, credit cards, any other ways you make money. You can start with the last month’s spending and income.
One option is to download all the statements from your bank’s website and sit down with them. (Yes, this might be more work, but the manual aspect of actually looking at each transaction can be helpful to start. Then you can always switch to a budgeting app.)
While you can choose to count either after-tax or pre-tax income, it could be helpful to build a budget around after-tax income—since you can’t budget money you don’t actually have. If you do count pre-tax income instead, one thing to remember is to budget in your tax payments.
Set Spending Targets
Once you track current income and spending, you should have a good idea of what your general spending categories and targets are. Then you can set some financial goals. Setting goals is at the crux of making a budget.
What do you want to spend money on? What are your debt obligations and recurring expenses? And what are your long-term and short-term financial goals?
Setting spending targets means setting broad targets for how much you want to spend per month, as opposed to setting specific line items for how much you want to spend in each category, such as gas or food.
When you do this, you should consider your recurring expenses, like student loan payments and rent, and then leave yourself a spending target for your discretionary income and a savings target for your longer term goals.
One option is a general 50/30/20 rule, which means 50% of after-tax income goes towards essential expenses, 30% goes towards discretionary expenses, and 20% goes towards savings goals. While the 50/30/20 rule has been around for years, it was popularized in Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan .
A general spending target like the 50/30/20 rule, as opposed to a specific line item budget, gives you flexibility for any emergencies that might come up each month.
Once you set spending targets, write them down and write down your financial goals—ie. how much you want to set aside each month towards saving for a house v. how much you want to spend on non-recurring expenses. Actually writing down goals increases the odds of achieving them. And then at the end of the month you can evaluate how you did and adjust as necessary.
Trim the Excess
Once you create a budget and flexible spending targets, then you can see where you’re spending more than you want and where you might be able to trim any fat. Here are a few tips for cutting down on extra expenses: from riding your bike to work to picking non-brand items at the grocery store.
Of course, the benefit of a flexible budget is you don’t have to trim every single bit of fat, as long as you’re in the overall spending range. For example, if 30% of your income is going towards discretionary spending, then you can decide within that 30% of what you want to spend it on.
But if you’re going over your target, whether that’s 30% of your income towards discretionary spending or a different goal, then you may want to look at where you’re spending too much: eating out v. buying groceries, for example.
Little expenses can add up quickly and budgeting can help control unnecessary spending. Check in on your budget from time to time to make sure you are on track for your spending targets and make adjustments as necessary.
Tips for Following a Flexible Budget
If you’re having trouble sticking with your budget, ask yourself why. Where’s the extra money going? Are your spending targets realistic?
• Aim for simplicity. Yes, you can track dozens and dozens of spending categories and set strict budget line items for each expense, but a flexible budget gives you more room within categories such as essential expenses for things like housing and utilities, discretionary spending for stuff like travel, and savings for emergency funds and long-term goals. Keeping it simple also cuts down on the time it takes to track your spending.
• A good thing to do is to continue tracking your spending and income in order to stay on budget. That lets you know how it’s going. And being accurate is important for feedback. This is where an app like SoFi Relay or one of the other personal budgeting apps out there, can come in handy.
• Aligning your goals and spending targets can also be important for sticking to your budget. If you want to spend more on travel, then plan that in to your budget. If paying off your credit card debt is important to you, then you may want to allocate accordingly.
• Plan ahead for the things you know are coming. Tax Day is always on April 15 and Christmas always comes at the end of December. A perk of a flexible budget is it lets you shift your spending in these months and if you plan ahead then you can adjust accordingly.
• Talking to your significant other about individual and joint financial goals, even planning a weekly or monthly budget meeting, can help with setting a budget as a couple or a family. If you’re not on the same page, then it’ll be hard to stay within your spending targets.
• One last option if you’re having a hard time sticking to a budget is to only spend what you can see. ie. If you only want to spend $500 this month on discretionary expenses, then it could be an option to put $500 on a prepaid debit card or withdraw that cash and limit yourself.
What is the Purpose of a Flexible Budget?
The whole point of a flexible budget is to give yourself enough flexibility that you can make adjustments and still be within your goals. A spending target means you don’t have to worry about spending $5 more in one category compared to another.
The point is how much you spend overall. So if you need to, you can then spend less in one place and more in another.
For example, having room in your budget to withstand financial setbacks or emergency costs means if your car needs a $300 repair this month, then you aren’t necessarily thrown totally off-budget.
One option is to spend the money on the repair and then cut back your spending somewhere else.
Additionally, having flexibility in your budget can make it a little more fun to stick with. If you spend less than one month and have some room for an extra cup of coffee or a drink out with a friend, then that’s a little more enjoyable than a super strict budget. That makes it more likely you’ll actually stick to your overall spending targets.
Even if it seems complicated, having a budget can potentially help you save money, stick your spending targets, and ultimately create a path to help you achieve your financial goals. It could even help you build credit by allowing you to plan credit card payments and bills into your budget.
This is where a cash management account that allows you to track your spending may come in handy. With SoFi Money® you can see your weekly spending within your dashboard right in the SoFi app.
Plus, all SoFi members have complimentary access to talk to a financial advisor, one-on-one, if you need some additional guidance.
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