Have you ever tried to start budgeting but then gotten discouraged at the process and stopped? Budgeting is so great for adulting because it helps you save money, have a better sense of where your money is going, and make good decisions about spending. However, budgeting can also feel too restrictive and limiting for our ever-changing lives. If you’ve ever tried budgeting, only to have it derailed by an unexpected car repair or medical bill, you know what I mean. The key to addressing these issues is flexible budgeting.
The following information is for individuals and families looking to create a budget that is simple, but allows for a sense of financial control while helping to reduceunnecessary spending.
What is flexible budgeting?
For individuals and families, flexible budgeting is a type of budget can evolve and shift with your income. The budgeting process provides wiggle room and flexibility for shifts in spending if one month we have to spend more on necessities (like those car repairs or an increase in the cost of goods–thanks inflation) and another month we spend more on non-necessities (like when we go on vacation).
Flexible budgeting delivers more consistent results than a fixed budget that doesn’t make much room for higher costs in your budgeted numbers or variable expenses that might crop up unexpectedly.
How do you create a flexible budget model?
Paradoxically, the key to an effective flexible budget system is developing good rules. The rules provide structure around which the budget itself can flex. For example, three important rules to start with are to:
- Have an emergency fundthat can cover 2 months of basic living expenses.
- Invest 10-15% of your income
- Save 10% of your take-home income
An emergency fund is a top priority. Financial advisors consider it one of the best practices you can implement to protect yourself and your budget. If you wreck your car or lose your job and have to rely on credit cards to fund you, there goes your current and future budget.
Not having an emergency fund is a little like Monopoly’s jail card: Don’t pass go, don’t collect $200.You don’t get to do much else until you have that emergency fund.If saving 2 months of living expenses sounds overwhelming to you, start with trying to save $500 and go from there. You can find greatmoney saving tips in my guide here.These tips will help you unlock extra money you can divert to your emergency fund.
Wondering where to save your emergency fund? Check out this great guide from Investing Bestie on emergency funds and high yield savings accounts (HYSAs).
How Much Should You Save and Invest?
Once you have an emergency fund, your next rule is to invest 10% (or more) of your income. For most of us, those investments will go primarily (or entirely) to retirement accounts. Indeed,financial advisors recommend that you save 15% of your income for retirement. That 15% can include any employer match you might have.
Finally, aim to save 10% of your income.If you have debt payments, you will want to divert some of your savings to pay down that debt.
If you’d like more guidance on saving, investing, and paying down debt, you can check out my posts on investing for retirement, paying down debt, and saving for any goal to figure out where you should save your money for short-, medium-, and long-term goals.
Financial advisors consistently say that these 3 “rules” should be your top priorities.Once you accomplish these, your budget can get much more flexible.
Use Savings to Create a Flexible Budgeting System
As noted above, you should aim to save 10% of your income. You might wonder what those savings are actually for. Once you have your emergency fund,your savings can go towards short-term goalslike a trip or Christmas presents. They can also go towardsmedium-term(3-7-year) goals like buying a house. Or you could focus your savings onlong-term goalslike retirement.
The savings bucket may sound boring. However, it actually gives you the flexibility to do cool things throughout your year and lifetime without wrecking your budget.
The important thing isto get clear on what you want to save for and then build that into your budget.You don’t want to deplete your savings every time you see a cool new pair of shoes on Instagram. So outline your goals and assess your big yearly purchases. If you go on a trip each year, buy Hanukkah presents, and are saving for a house, you might consider saving 15% of your income and putting 5% of that towards a down-payment fund, 5% to a trip fund, 2% to a Hanukkah presents fund, and 3% to unspecified savings for goals you haven’t considered yet. I outline how to do this in the envelope section below.
While it may seem restrictive to get so specific about your savings,doing so lets you be more flexible with your day-to-day spending because you’ll have the money set aside when that big purchase comes up.Having your savings specified also helps you stay on track with your goals and keep up with any big expected costs.
Make Percentage Targets for Necessary and Non-Necessary Spending
Hopefully you have allocated about 20% of your income to investing, saving, and, if necessary, paying down debt. This means you have ~80% of your take-home pay left to work with.
Thegeneral recommendation is to allocate 50-60% of your take-home income to necessary expenses. Necessary expenses include thingslike your mortgage/rent, utilities, car payments, and other fixed costs. The other20-30% goes to non-necessary expenses. Non-necessary expenses include costs like subscriptions, eating out, etc. These non-necessary expenses are generally more variable costs that likely fluctuate month-to-month.
If you are creating a flexible budget, it helps to set your ideal targets for these two buckets. For example, you may ideally want to spend 60% of your income on necessary expenses and 20% on non-necessary expenses.
However, to give yourself flexibility, aim to keep all these expenses to 80% of your income. There will be some months where you’ll go over your budgeted amounts for necessary expenses. And some months where you spend more on non-necessary expenses. As long as you’re meeting the 3 rules above, it’s okay to have flex in the amount you spend on necessary and non-necessary purchases.
Plus, your savings and emergency fund will hopefully help smooth the bigger bumps in your expenses to keep you on track month-to-month.
Automate Your Investing and Saving to Cut Time
To sum up where we are so far, you should ideally:
- Have a 2-month emergency fund
- Invest 10-15% of your income
- Save 10%+ of your income
- Use the remainder for necessary and non-necessary expenses, aiming to spend about 50-60% on necessary expenses.
Even those 4 things can feel like a lot to keep track of. How do you ensure you’re not super over budget or that you’re saving enough for your goals without spending tons of time on the process?
The key is using automation.
You may already have a percentage of your income automatically diverted to your 401K. If you don’t (or if you’re currently not investing 10% of your income),set up an auto transfer to direct money automatically into a retirement or other investment account.For example, my employer automatically directs 5% of my pre-tax pay to a 401K and I automatically direct 5% of my take home pay to a Roth IRA I set up.
I also automatically direct money to a savings account. Because I’m desperately trying to save for a house, I automatically direct 40% of my take home pay to savings. Again, for most people that will be way less.
If you’re not sure how to set up automatic transfers, you can usually find the answer by searching for the name of your financial company and “how to set up automatic transfers.”Many companies will have the transfer setup in themenu optionsat the top of your page or in youraccount settings page. You can set up transfers to happen every month or atlonger (or shorter) intervals. You can also oftenspecify whether a percentage or a dollar amountis transferred from your bank account to an investment or savings account.
Consider Using the Envelope System
Many savings accounts now let you set up envelopes for specific goals, like a trip, presents, or a downpayment on a house.
That means if I direct $2500 to a savings account each month, it can automatically send $2000 of that to a downpayment envelope, $400 to a trip envelope, and $100 to a present envelope if that’s the breakdown I want. I also have an emergency fund envelope that I do not touch unless there is truly an emergency.
You can easily move money in and out of these envelopes, they are just a tool for keeping track of your progress towards your goals. They also help remind you what your savings are for if, for example, you’re tempted to pull them out for a new tattoo instead of that trip you really want even more. Side note, if you want guidance on planning a great trip on a budget, check out some amazing tips for planning a budget vacation from Maxed Out PTO.
Use Apps to Track Spending
Automatically saving and investing saves you a lot of time and helps you stay clear on how much money you have to spend on everything else. Using a budgeting app can make this process even easier.
I used to have a giant spreadsheet where I kept track of literally every expense. That felt like the opposite of flexibility and was unnecessarily stressful. I love budgeting apps for facilitating budget flexibility.
Most budgeting apps will automatically track your spending and compare it against your budget goals.If you have specified that you aim to spend, say, $3000 on necessities and non-necessities, budgeting apps will tell you how much you have spent so far, how close you are to your spending limit, and how much left you have to spend per day to meet your spending goal.
Consequently, if you splurged on Taylor Swift concert tickets at the last minute (a purchase you didn’t plan or save for), you can see how much left you have to spend for the month and adjust the rest of your spending accordingly.
Great Budgeting Apps for Flexible Budgeting
My favorite budgeting app is Rocket Money.Rocket Money easily integrates with accounts at most financial institutions to provide you detailed information on your financial accounts. Plus, they send helpful reminders about upcoming bills or increases in bills, they identify your subscriptions and cancel ones you don’t want anymore, and they can even negotiate lower phone and cable bills for you. They provide a lot of easy-to-understand financial data to give you a quick sense of your overall financial performance. While there is a monthly cost for this app, you can choose the price you pay each month. Most people pay $7 a month for the app.
A similar and very popular budgeting app is Mint.Like Rocket Money, it integrates with multiple financial accounts to provide you with a real time financial analysis; tracks your savings, spending, and assets, and can identify subscriptions and negotiate bills. Mint is free, though the premium version with all the cool features is $4.99/month.
YNAB is an app that’s beloved among personal finance nerds (a term I use affectionately).It’s the most expensive of the apps at $14.99/month. It lets you track spending, saving, assets, and your budget report and has a clean interface. It’s very customizable though also a little harder to set up than some of the other options. Some users report spending a great deal of time setting up the interface.
Zeta is designed for couples.It lets you integrate joint and individual accounts, set budget goals, even hide expenses from your partner. Ideally you’re just hiding those presents you got one another.It’s a newer app on the market and is apparently a little glitchier than some of the other apps, though could be a good option for many couples.
To Sum Up
The key to flex budgets are to set up a few baseline rules and use automation to enforce them with no additional thought on your part. While you should aim to spend 50-60% of your income on necessary expenses, a flexible budgeting approach understands that that percentage will shift month-to-month and that’s okay! As long as you are meeting your savings, investment, and debt payment goals, the actual expenses themselves don’t matter quite as much.
Indeed, a flexible budget doesn’t require frequent budget adjustments or constant checking. It adapts to your life and all your various activities, while delivering a greater sense of financial control and helping your achieve actual results in reducing your spending. You can then easily determine how much you have left for all of your remaining spending.Adulting win!
If you enjoyed this post, please consider liking, subscribing, or sharing with others. It’s always a big help and I really appreciate it! If you’re interested in related content, check out my post on crafting the perfect budget with 5 easy questions, investing for retirement, and how to protect yourself from financial disaster.
And remember that I am not a financial advisor. Before making any financial decision, speak to a financial professional for any of your financial planning needs.
