While it may not be the most exciting activity in the world, building a budget is one of the most important pieces of getting your financial life on track, especially if you’re starting from a particularly precarious point. When I first realized I needed to improve my money situation, I was in debt and had no savings. Creating a budget was my first move in the right direction. I figured out what I was required to spend for my needs, and moved on to what I’d like to spend on my wants.
The state of my finances dictated I didn’t have anything left over for wants, and I was hardly meeting my needs with my income, so I had to make some sacrifices to reduce the cost of living. After a while, when I was earning more income, out of debt, and increasing my savings, I could loosen up my budget and afford some of the wants.
Budgets are seen as negative for two reasons:
- Typically, budgets are designed with the intent of restricting spending rather than allowing spending.
- Typically, sticking to a budget means not having flexibility.
When budgets are viewed as negative, people are less likely to follow them. Budgets should be approached as a positive — a recipe for spending that frees you, not limits you. One way to take that approach is to add in some flexibility.
Flexibility in budget categories
With budget categories, it’s easy to feel locked in. Budgets can cause stress, and stress can physically manifest itself in many harmful ways. Chances are you’re already stressed about money, so allowing yourself to be worried about making your budget could be harmful to your health. Yet, if you’re three weeks into the month and you’ve already spent all the money you have budgeted for that month’s food, having a strict budget can lead to negative feelings about that budget. You may consider this situation your fault, if you didn’t plan the month properly and could have spent less earlier, and guilt is yet another negative feeling related to the budget.
In reality, you’re not going to just stop spending on food if you’ve reached the end of that month’s funds. You’ll either borrow from another category’s spending or, if it’s available, turn to credit to feed your family for that last week or so. Either way, if your budget is strict, you may interpret this as a step backwards, and if it happens often, it could mentally derail your financial progress.
When designing and sticking to a budget, it’s important to keep in mind that it is acceptable to borrow from an unused category to cover unexpected expenses in another, even if it’s a result of poor planning. You can always do better the next time. If you do need to resort to credit, don’t fret; pay off the debt with excess money from next month’s budget. If, however, you start to see a pattern of spending beyond your budget in one category from month to month, it’s time to reevaluate your budget and decide if you need to change your spending, adjust your categories, or earn more income to compensate.
Flexibility in time
Most people budget from one month to the next. Every month, the budget resets and you’re given a clean slate. When you’ve reached the end of the month and haven’t spent your full budget in any particular category, you have a few good options. First of all, this is a great position to be in, because you’ve spent less than you’ve expected, and you’ve survived. You can use this as an opportunity to look at your spending, and if you think this is sustainable, adjust your budget going forward to represent the lower amount of spending.
The options you have for your surplus can go a long way to improving your financial condition. Let’s say, across three categories like food, clothing, and utilities, you spent $100 less than you expected. Most of the time, that $100 would just disappear, remaining in a checking account for another day. Here are a few ways to look at that $100 and turn it into something positive.
- Roll it forward. Apply the $100 to next month’s budget and let it be a cushion for your spending.
- Splurge. While not best for your financial growth, creating rewards for yourself for sticking to your budget is a good way to keep yourself motivated.
- Pay off debt. Adding $100 to your Debt Avalanche can save you money in interest.
- Save it. Use the $100 to add to or start a high yield savings account.
In our interview with J.D. Roth earlier this month, J.D. pointed out that year-based budgeting is more effective than month-based budgeting. I think that month-based budgeting is easier to keep track of, but when you look at your expenses on a month-to-month basis, you miss expenses that come up at certain times during the year. For example, when you design a budget, you’re not necessarily thinking about spending on gifts for your family, but if you create your budget based on what you spend in February, when December comes around you may find that you haven’t planned properly. Basing your budget on the expenses you need to cover across an entire year will help you think about what you might be forgetting on a month-to-month basis.
From there, you could take your annual budget and divide by twelve to determine your monthly spending, and when that happens, flexibility of time is necessary. You could calculate that your gift-giving budget amounts to $80 a month, but when it comes time to spend that money, most of it might be spent towards the end of the year. If you start spending $80 for gits each month because it’s in your budget, you won’t have anything left over when the December holidays come around. So annual budgeting takes a little more discipline to make sure you’re spending at the right time, and it emphasizes the point that what you don’t spend in one month can be added to the next month’s budget.
The more dire the situation is, the less flexibility you may have to work with, but some flexibility and the right approach could make budgeting much more effective. Aim for a positive approach with flexibility to move between categories rather than strictness and an approach based on money scarcity, and your budget will have a better chance of succeeding. With budgeting success, your financial condition will continue to improve, and at some point in the future after long periods of good habits and increased income, a budget will be less necessary for your future overall financial success and independence.
Published or updated May 28, 2011.
{ 15 comments… read them below or add one }
The hard part is budgeting for emergencies. Just when you think you have a little extra in savings, something comes along to gobble it up. But it’s better than throwing it on the credit card.
I plan on making a budget (er, spending plan) this weekend so I can get a better handle on my finances. In the past, when I did a better job of this, I would take intermittent expenses like insurance payments or car license plates and divide it into a monthly amount. That amount would go into savings so that the expense could be paid when due and not have a large chunk due all at once.
Building and following a budget is a fundamental principle that anyone would benefit. In addition, it’s a good idea is to keep a detailed list of every financial expenditure, even if it’s $1.25 on a candy bar. It’s a surprise for most when they discover how much money they spend on items that could be better saved.
this is one of the main aspects of my financial picture that i need to focus on. i have more or less have every thing in order and am putting money where it needs to be going, but, i am certain i can be more efficient, much more so, and find some extra funds to put to better use.
i have always pushed this off, but it is time i begin to tackle this in earnest.
Mary Hunt talked about a “Freedom Fund,” which means you add up the year’s anticipated extra expenses (holiday and birthday gifts, car insurance, property taxes, insurance co-pays, whatever), divide that number by 12 and put that amount into a separate account each month. By the time the holidays roll around, you’re covered. As insurance co-pays are billed, you’re ready for them.
If you know this year will hold an irregular expense (your tires are starting to look bad), then add that to the account.
If there’s any left over at the end of the year, leave it where it is if possible, for irregular expenses you couldn’t anticipate. Those are always showing up, right?
Excellent read! Though I am good at sticking to my budget, I always like to read anothers view. I glean what I can from them. Negative perceptions can be changed, and this includes perceptions towards budgets. Thank-you for addressing this. I use mind over matter when it comes to my budgeting as well.
My husband and I actually sat down and wrote out a budget about three years ago. We do it on a month to month basis but it could be described as a year long view. I take categories that you do not spend in each month and budget it that category month long. For example, we pay out house insurance once a year but we budget once a month into this category. We have a great credit union we bank with and have several accounts set up. Once a month, DH will move money from the main account to the ones designated for house insurance. We have one for gifts, clothing, house repairs and vacation. When we get ready to spend we move it from the designated category to the main account and write a check or whatever. It may sound complicated but it works and it is incrediably freeing. We can borrow from an account or decide that this account is to be cut back on or eliminated all together if we need to .
It should be noted that we budget in an allowance for each of us. If we want more clothes than we have budgetted we use it. This has helped us to change from a family that use to fuss about money so much that we both had doubts that our marriage would last to one that is on the same page as a family.
good post & i’m someone who budgets a monthly allowance rather than a full year. But year based budgeting is something i’ll look into.
My budget is very inflexible at this time due to the amount of debt & bills I have is almost equal to my monthly income. I have a couple of debt items coming off my budget in the next couple of months but unfortunately I have other needs that will be replacing them around the same time (increased daycare costs and loss of sis-in-law rent assistance since she is moving out). It can be very deflating at times when I look at my budget and can’t fit in room for wants, even though I have no one but myself to blame for this situation I am in. I am actually looking into getting a part-time job to add some space in my budget. I just do my best to look forward to the day (likely end of this year) when I can extra income to use for wants.
We have a yearly budget but we then break it down into a month by month scenario so we can assess if we are on track. It seems to work quite well.
We are moving into a new home in a few weeks and have had to reassess our budget to allow for home improvement projects. Creating such a budget really helps us with prioritizing what projects we want to do, and in what order. Since our kitchen is first on the list, we’re very hopeful that we don’t blow the entire budget on the kitchen, since my husband loves to cook and would like the professional-grade appliances. My checkbook is grimacing just thinking about it. LOL
Another word that I like to associate with budgeting is “deliberate”. You are deliberately setting up your budget, deliberately trying to stick to it and deliberately making yourself accountable.
When you talked about what to do with the hypothetical $100 you also have to be deliberate in what you do with it. Previously, I did like you said and just lit it sit in my checking account and eventually be spent on “stuff”. Making the choice in what you do with the money is a very important choice in dealing with your budget.
We’ve been doing well with our $25 weekly grocery budget,but many of my goals are on the scale of a year or more. I think there’s definitely a balance to be found in short and long term planning and that’s why many people end up with monthly budgets since it’s a mid range unit of time. Personally, I like units of a week (it’s easy gratification) for budgeting frequent expenses and having longer range goals.
We review our budget before the start of most months. We were on vacation and missed getting this months set before the 1st. This way we can adjust each month for things like birthdays or holidays. We start planning for some bigger events months in advance. Amazon credit built up from using Swagbucks tends to cover almost all of Christmas so that is not a big expense for us. We do plan some flexible spending (personal spending) into the budget each month and we have Auto and Medical budget lines roll-over from month to month.