How We Budget Without Hating Our Budget
📐The Rules of the Game
Sometimes with personal finance, we need to get back to the basics. Investing is powerful but if you are not able to save money each month to invest something has to give. When I decided to take the leap into entrepreneurship our old “budgeting method” of seeing if our checking account was greater than the balances to pay off on our credit cards wasn’t going to work anymore. After some trial and error, and maybe a few false starts, we have finally found a budgeting system that works for not only us but many families I work with too. If you are struggling with how to budget and don’t want to feel constrained by typical budgeting systems flows-based budgeting is a wonderful solution. Keep reading!
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How We Budget Without Hating Our Budget…or Each Other
From envelopes to detailed spreadsheets or hope and a prayer I have encountered just about every kind of budget method you can think of. Whether it’s a loud budget or a secret one each partner keeps to themselves we all have some rules, er unspoken guidelines, around our spending. In my own home, we use credit cards for daily spending that we pay off in full each month. Our original budgeting method, circa 2018, was simply to keep the balance below $8,000 each month and that would generally keep us on track.
Then life happened. We bought a house, had a baby, started a business, and our old budgeting method wasn’t quite going to cut it anymore. This was a problem that needed solving, and fast.
Now, as a financial planner, I have access to a wide range of software and webinars all of which promise to help you create the perfect budget and 99% of them are garbage. It got even worse when the budgeting software Mint shut down because then every budgeting app out there was fighting for its business. The truth is budgeting software is not a budgeting solution. Budgeting software is a tool. So if you are looking for a solution stop looking at the software and keep reading.
Among the (too many) webinars I watched on budgeting techniques was one by a fellow planner, Natalie Taylor, CFP called “Helping Clients Manage Their Budget in Real Life 2.0” and it was epic. In this presentation she described a technique called “flows-based budgeting” and to say the lightbulb went off was an understatement. It just made too much sense. The budgeting system she described allowed freedom and flexibility while still adhering to guidelines. It also allowed for lumpy spending on things like travel without feeling like you busted your budget. She shared how regular check-ins using one simple number can help keep this whole thing on track. Yes, please.
Flows-based budgeting begins by categorizing your expenses into three basic groups based on the timing and level of in-the-moment influence you have over them. The three categories are fixed expenses, flex expenses, and non-monthly expenses. Let’s discuss each one and then how you might implement this system.
Fixed Expenses
The first category of spending is your fixed expenses. These expenses are usually paid monthly or weekly and are also usually on autopay. Since they are on autopay you aren’t generally making an in-the-moment decision for these expenses. Sure, you have some subscriptions that could be cancelled but you are making a passive decision each month to let them continue. Examples in this category might be your mortgage, rent, daycare, insurance premiums, utilities, and various subscriptions.
Flex Expenses
The second category is where the real magic comes in. Your flex expense category represents your everyday spending and things that are not on autopay. This category is where you are making active decisions “in the moment” to spend. Examples in this category might be your groceries, dining out, shopping, gas, small gifts, and house supplies.
Non-Monthly
The third category is where all your lumpy expenses that usually “blow your budget” live. Your non-monthly expenses are things that happen less frequently than monthly but usually still require an active decision. Examples here include travel, gifts, celebrations, fun money, non-monthly insurance premiums, and home maintenance.
How to Implement
Now that you understand the three major categories, how do you use them? First, you will want to break your flex expenses down to a weekly number. For example, let’s say on the items you categorized in the flex list you usually spend $4,000 a month. That means each week you probably spend about $1,000. Next, I recommend you nominate one credit card (that you will pay in full!) or a checking account that you will use exclusively on flex expenses. This allows you to easily check in once a week and see if you are on or off track toward your flex budget for the month. For many couples, Friday night is good check-in time looking back at spending from the last Saturday morning. If you are using a dedicated card or checking account your check-in should be very quick. The beauty of Friday night is it also sets you up for the weekend knowing if you can relax and enjoy or need to be a little more conscious about your spending.
The other important piece to implement is your non-monthly budget category. I’ve seen two variations of this one. Either you fund your non-monthly expenses from a lump sum (think annual or quarterly bonus) or you fund your non-monthly expenses each month from your regular pay. Depending on how and when you get paid and how reliable each form of income is you might favor one over the other. Usually, I find it best to hold the bulk of your non-monthly in a separate high-yield savings account and transfer funds as necessary when a non-monthly expense comes up.
Let’s look at an example:
In the above example, this couple first sets aside 10% of their take-home pay $1,500 towards their goals. Then this couple would check in each Friday ensuring they are on track to keep their flex spending within the $4,000 range for the month. They would also transfer $1,500 to a high-yield savings account each month used to fund future non-monthly expenses. If they took a trip that month and spent $5,000 for example then they would transfer $3,500 ($5k-$1.5k) from that high-yield savings account into their checking to fund the non-monthly expense.
Sounds like a plan worth trying?
First, the best time to start is now. Don’t wait until the holidays are over or you think your spending will be more “normal.” There is always an excuse not to start but the sooner you get going the more data you will have! I’d also recommend you start just gathering data versus imposing restrictions, of course, this is assuming your income minus expenses is usually positive.
So, how do you start? First, I would open a good, old-fashioned spreadsheet and list out your expenses in the fixed, flex, and non-monthly categories. Here is a template you can use:
Now take a look at your total estimated flex spending, divide that by 4, and that’s about the amount you should be spending in your flex budget each week. Next, I would designate a credit card or two as your “flex” cards and pick a day of the week when you will check in on your progress. Again, I find Saturday morning to Friday night a good time frame but choose dates that work for you and your family. Now it’s time to repeat, refine, repeat, and refine.
It will take work to get this process working for your family but once it does it can be a game changer. For my family it has given us such a clear picture into what our travel budget can be each year given we keep our flex spending in line with our goals. That’s the beauty of a budget system that shows you what is possible and not what your restrictions are.
Once you feel pretty good about your spreadsheets version 2.0 of flows-based budgeting is implementing software as a tool to help. My husband and I use Monarch Money and love how easy it is to track our fixed, flex and non-monthly spending.
By the way - if you want more personalized help implementing flows-based budgeting to reach your investing goals you can learn more about how I might help and schedule a complimentary introduction here.
So what would Kelly do? My family has implemented flows-based budgeting and uses Monarch to help us track each category. For us this system helps both of us clearly plan even though as a business owner my income might be more lumpy. We also tend to have lumpy spending with travel being a big line item so allowing that to sit in a different “non-monthly” category has given us true insight into our spending.
Keep in mind, our financial situation probably is different in many ways. Just because I do something does not mean it is what you should do. I include this portion as a practical idea of how one might implement certain financial planning techniques.
Mom’s Memo
Mornings have been a bit touch and go lately in our household. I am grateful to have a son who does not wake up at the crack of dawn but on the other hand that sometimes means he just does not want to get out of bed. Most mornings we wake him up so he can eat breakfast and be off to daycare in time for our workdays to start. The problem is he seems to want to lay in bed much longer, and honestly I can’t blame him. I’m not particularly a morning person either…
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I really like this concept. Tracking grocery shopping can be exceptionally hard, but having the grouped amount under 'flex' makes a lot of sense. The template is difficult to download on my end; is there any way to have it saved as a Google Sheets file for easier download and access?