A great way to get a grip on your spending—and maybe improve your saving habits while you’re at it—is to create a budget.
Yeah, you’re probably groaning. We know for many people, the word budget equals boring, time-consuming, and stressful. But, really, it isn’t all that tough to put a plan together.
Thanks to books and websites designed specifically for “dummies,” software programs that can help you monitor your expenses by plugging in a few numbers, and apps that do most of the tracking work for you, building a budget is easier than ever.
Of course, living with that budget is another story. It can be especially difficult if your income, or your partner’s, is unpredictable (if you’re a freelance or contract worker, a commissioned salesperson, a student who gets money from home or loans, or someone who has flexible work hours, for example); but also if your expenses tend to vary from month to month (and that’s pretty common).
Which is why it can help to know about two different budget types often used in business accounting—a static budget and a flexible budget—and how you can apply them to your personal finances. Here’s how it might work:
A person with a static budget presets spending limits based on historical data and/or expectations for the coming year. Modifications aren’t made to allow for real-time events. (A slow month for a contract worker, perhaps. Or an unexpected car repair bill.) The amounts don’t change—even if circumstances do.
So let’s say, for example, based on what she made last year after taxes, a freelance graphic artist expects to make $60,000 this year.
And using what she spent last year, she decides to set aside $500 a month for transportation costs (car payment, fuel, insurance). No matter what happens, that’s the amount allotted for this particular expense, and it’s her goal not to exceed it.
A person with a flexible budget adjusts for outside factors. The amounts allocated to various categories aren’t set for the year, they flex from month to month, or even week to week.
So, if the graphic artist lost a client, she could rework her budget to accommodate the lost income until she picked up new work.
Or if she suddenly had to buy a new laptop, she could modify the budget for the next few months and pay the bill without pulling out her credit card.
There are pros and cons to both approaches.
Static vs Flexible Budgeting
A static budget is sometimes referred to as a master budget, and it can be a good way to start planning. You always know how much you have allotted to pay for certain expenses.
And because the numbers are constant, it may be easier to predict what you can and cannot do from month to month. It also can cut down on the amount of time you spend working on your budget.
A static budget also can help with setting priorities. If you’re able to stick to it, you’ll use the money that comes in every month to pay the bills that need to be paid, and you won’t spend more than you earn.
The potential problem with a static budget is that it isn’t based on what’s happening now. The bridal shower you want to throw for your best friend, and the dress you have to buy for the wedding.
The co-pay on your chiropractor’s bills when you hurt your back. Or the added rent you have to pay because your roommate relocated for a new job and you can’t find someone to take her place.
This is why a flexible budget may be a better fit for many people—especially those who can’t pinpoint exactly what their monthly income will be.
What is a flexible budget? It relies on current information. You can review the data—what’s coming in and what’s going out—and adjust accordingly. So if a client doesn’t pay his bill in July as you expected, or an unexpected expense pops up, you can juggle things around a bit.
You might temporarily cut some discretionary expenses, such as entertainment or clothing, for example.
A flexible budget also can allow you to jump on an opportunity, like a chance to go to London for half-price when you find a killer deal online. And it can offer a clearer path to problem-solving.
That doesn’t mean a flexible budget is right for everyone. Because it changes to suit what’s happening now, it may take more effort to draw up a new plan every month and more discipline to stick to prioritizing needs over wants. If that’s not for you, a static budget may be a better choice.
Or a hybrid approach might be appropriate. That could include setting up a master budget at the beginning of the year based on projections and using it as a guide, tracking costs as the year progresses and making adjustments when necessary, and then using that information to better inform next year’s plan.
Starting the Budgeting Process
The point of a budget—whether you’re a freelancer or a full-time employee—is to spend less than you earn. Here are a few steps that could help you get started:
Figuring out What You Spend
If you aren’t already tracking your spending, that may be a good place to begin. There are several ways to do this, from carrying around a small notebook and writing down every expense, to using a spreadsheet, to downloading an app on your phone.
Once you’ve tracked your spending for a few months, you can determine your average spending in various recurring categories. Some of this will be fairly easy, because the costs are often the same (housing, car payment, student loans, etc.). Others will vary from month to month or at different times of year.
Utility costs may go up or down, for instance, depending on the season. Or your travel costs may go up if you take a summer vacation. And some costs, such as clothing, entertainment, and household goods, will be more discretionary than others.
If you’re self-employed, you may want to consider taxes, retirement savings, insurance, and other expenses that others might have automatically withdrawn from their paychecks every month.
Determining What You’ll Earn
Pinning down how much you can expect to earn is often much easier for those with regular paychecks. If you’re self-employed but have steady clients who pay on time, or your job is a mix of paychecks and tips or commissions, you may be able to come up with a fairly accurate estimate.
But if you’re a freelancer or contractor whose work and pay varies widely from month to month, it can be a challenge to set this amount.
Again, you can use your spreadsheet or tracking app to determine an average amount earned ($4,000 in July + $5,000 in August + $3,000 in September would be $4,000 a month, for example)—which may give you a more realistic number on which to base your budget calculations than guessing (or hoping) that you’ll make a certain amount.
Creating a Budget Using What You’ve Found
Here’s where you can determine the type of budget you want to use. With a static budget, you would set spending limits and stick with them throughout the year. With a flexible budget formula, you would set spending limits, but adjust when necessary: If you make less than expected, you spend less than you planned.
If you see that you’re spending more in one category than expected, you can shift allocations or find ways to cut recurring costs like your cable bill, haircuts or pedicures, or gym membership.
If it looks as if you’re headed for a long-term shortfall, and you just can’t cut it any tighter, you may have to find a way to earn extra money by taking on a side gig or perhaps raising your freelance rates. What’s important is setting a realistic budget, so you can stick with it.
Considering the 50/30/20 Plan
Looking for flexibility, but don’t want a budget you have to rework every month? You may be a candidate for the 50/30/20 budgeting method made popular by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi.
The plan suggests putting 50% of after-tax income toward essentials like rent and food, 30% toward discretionary spending, and 20% toward savings.
This method also makes sense for people who don’t have a steady income, because it’s based on percentages. And those percentages are just a guideline for getting started, so you can shift the amounts to make it work for your finances.
You can save more or less, depending on what you’re earning or what long-term debts you have. Or you might move a few percentage points from discretionary spending to cover essentials if you live in a city with higher housing or transportation costs.
Building a Backup Fund
If possible, consider making an emergency savings account a priority. Life has unexpected ups and downs for everyone, but for freelancers and other self-employed workers, things can be particularly unpredictable. If you get sick or hurt, you could lose income—or worse, lose clients—while you recover.
A payment could be late or disputed. Or you may want to take a vacation, which means you’ll be spending but not earning. Many people typically recommend having three to six months of essential living expenses in an account that’s easy to access, such as an interest-bearing online cash management account.
If you decide to save even more for extra security, you may wish to invest that amount—although it may be more difficult to get your hands on that money when you need it. And if saving anything at all seems daunting at this point, don’t worry—starting small, with $100 or $200–can be better than never starting at all.
You may have heard about foreign governments using austerity measures to avoid or relieve a debt crisis. You also may have heard they make people miserable, and rarely work.
With a personal budget, cost-cutting measures can be a sign of fiscal responsibility, but if you can’t splurge every once in a while, it may make it harder to stick to your overall plan.
So how can you splurge responsibly? You might choose to put your bonuses, unexpected earnings, and tax refunds straight into the bank with a trip or some other big spend in mind.
Or you could build the extravagance into your budget, with a category specifically for vacations or travel, or one for home renovations, and deposit that amount into a separate account just for that purpose.
Thinking About Tomorrow
Many experts recommend signing up ASAP if your employer offers a 401k or some other retirement plan—especially if there’s a matching contribution involved. If an employer plan isn’t available to you, you may still want to make it a goal to invest something each month in a traditional IRA, Roth IRA, or Simplified Employee Pension (SEP) IRA.
With a traditional IRA or SEP, you can defer paying taxes on the money you invest until you take withdrawals in retirement, which can keep you in a lower tax bracket.
Or, if you’re nervous about tying up the money that long, you could go with an after-tax Roth account, which allows you to withdraw contributions (but not earnings) at any time. You can open an IRA at a brokerage, bank, or other financial services provider, including SoFi Invest®.
With SoFi, you can open your account online and transfer money electronically. You’ll also have free access to financial advice.
And if you’ve left a 401k behind at a past employer, you have the option of doing a rollover that puts that money into your new account. Since the tax laws regarding IRAs can be fairly intricate, it’s recommended that you speak with a tax professional.
Reining in Spending, Reaching Your Goals
If the idea of using a budget—static or flexible—seems like pure drudgery, it may help to think of it primarily as tracking your expenses. With a SoFi Money® cash management account, you can track your spending in your weekly dashboard within the app.
Once you get a handle on what you’re spending every month, you may have a better idea of how you might be able to cut some costs and how you can avoid outspending your income.
If your goal is always to have enough money for the things that are important to you—whether it’s a car, a house, or a new pair of shoes—a budget can help get you there.
Plus, with SoFi Money vaults you can easily create different vaults within your SoFi Money account for different savings goals. For example, you can create a vault for an upcoming vacation or one for emergencies or both.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.