One reason budgeting gets a bad rap is that traditional budgeting often makes people feel like failures. When the month’s spending doesn’t match the amount you projected at the beginning of the month, it’s easy to decide that budgeting just doesn’t work.
Traditional budgets set spending levels in each category at the beginning of the month. This can be frustrating because those decisions feel rigid and unchangeable, at least for the month. It feels like cheating to increase a category limit midway through the month. When you set your grocery budget at $300 and end up spending $360, you feel like a budget failure. When in one month you go to both a wedding and a birthday party, and spend more than allocated on gifts, you wonder why you even try. Continually going over-budget causes discouragement, and discouragement makes people give up on budgeting altogether.
A flexible budget, on the other hand, allows for variations without ruining your bottom line or making you feel like a failure. When unexpected expenses come up or your priorities change, your budget should change accordingly. It’s perfectly fine to change your category limits — it would be foolish not to. With our flexible budget, we are confident that there will never be a single month that our expenses exactly match our beginning-of-the-month projections, and that’s just fine. Flexible budgeting is not failed budgeting — it’s realistic, guilt-free, liberating budgeting.
Keeping Your Budget Reliable
On Day 7 of the Frugal Fresh Start Challenge, we covered the YNAB budgeting method in which you allocate your actual, on-hand cash to your highest priority budget categories, consistently enter spending for those categories as you spend during the month, and check potential spending against the available category balance before making a purchase. (Remember, while we love YNAB, you could also use your own spreadsheet with YNAB rules and enjoy the benefits of the philosophy.) Because you are budgeting with actual money rather than expected income, and recording expenses against the categories as you spend money during the month, you can implicitly trust your budget to show exactly how much is available in every category, every time you look at the budget. Your budget is a reliable indicator of your spending ability.
In YNAB, it’s easy to ensure that your budget stays reliable. If you still have money to spend, the category balance shows black. If you have a red category balance, you have spent more than you had allocated to that category. When there is a red number in the third column, your budget is no longer reliable. You can’t trust it to show how much you have to spend, because the over-spend in the red category has to come out of some other category, but you haven’t changed the budget to indicate which category needs to be decreased. It’s important to correct this as soon as possible by freeing-up money from other categories.
Changing Category Allotments
Before spending money, we check our category balances (third column) to see if we have sufficient funds allocated for the proposed expense. If we do, we probably make the purchase. If we do not, we need to decide if this purchase is really a priority for us right now. If we decide that we need or want to over-spend in a category, we need to add other funds to that category before going through with the transaction. We can take unspent funds from another category and add it to the category where we need more funds.
Note: YNAB has a neat calculator function that makes changing your budget a breeze. When you are on a cell in the budget column (first column), you can just hit + or – on the keyboard, then the number you want to add or subtract, and YNAB will make the calculation in that cell for you. It really makes moving money around easy. You can always double check by looking up at the “available to budget” number at the top to make sure it stays at $0 and doesn’t go into the red.
Remember that changing your category allotments and moving money around throughout the month is part of the plan. It’s all about your priorities and being empowered to make decisions as they come up. Making changes multiple times every month is normal. It’s not a big deal. There’s no need to fret.
This is a healthy way to use your resources. An unhealthy way is to arbitrarily set a number at the beginning of the month, let those arbitrary number choices govern your priorities during the month, and feel like a failure when real life doesn’t match your beginning-of-the-month guesses. With flexible budgeting, you get all the benefits of living within your means (what budgeting is really about) and all the freedom to decide, guilt-free, what you want to do with those means as real life unfolds around you during the month. You get to make the choices, rather than being constrained by strict rules and untouchable category limits.
A Visual Example
This one’s for the visual learners out there! I could show you with a video in about 24 seconds, but opted for a million screenshots instead. You can click on the images to make them bigger if you need.
Quick scenario: Our Internet bill comes out to more than we expected. (Does anyone else have their home Internet bandwidth metered?). We decide to pull the necessary funds out of our Household Goods category. The money taken from Household Goods moves up to our “available to budget” at the top. We then allocate that money to the “budgeted” column in Internet. Now we don’t have any red numbers in our “balance” column and we can trust our budget again!
It really is easy, even though I took a million screenshots to show you. I just wanted to make sure you knew about the cool calculator function!
Reporting What Matters
When we first started “making personal finance public” by giving a monthly report of our actual earning, spending, and debt repayment, I would share the amount that we had budgeted for each category as well as the actual spending. This is a normal approach for reporting a traditional budget. You can see how well your actual spending matches up with you projected spending. Once we started using YNAB, I changed my reporting method. The amount we set on the first of the month isn’t important. What is important is that as we make choices during the month, we keep our total spending lower than our total income, with as much allocated to debt repayment as our priorities allow.
Now I report how much we spend in each category, how we decided to make any unexpected spending changes, and how much we reduced our outstanding debt. Some months, as we roll with the punches, we end up spending more than we had projected in total, and end up with a lower debt repayment. Some months we spend less and pay off more debt. Every month, though, we set priorities, make initial projections, and then modify our budget to match our choices as real life meets our best guesses.
Just for the record, with categories like groceries, where our needs don’t change much month-to-month (we still eat everyday), we do try to keep within our set $300 per month. It’s kind of a fun challenge. 🙂
Look at your budget that you set up on Day 7. Are there any changes that you need to make? Don’t hesitate to move money around if you need to. In the future, you can make changes (moving money from one category to another) as the need arises. Remember that your budget categories contain real money, so you should not spend more than is allocated to the category.
- Have budget “failures” discouraged you in the past?
- Have you tried a flexible budget before?
- Maximizing Debt Repayment at the End of the Month
- The Best Thing that Ever Happened to Our Budget: Why we switched from Mint to YNAB
- Budgeting Every Penny: Zero-based Budgeting with YNAB
- Living on Last Month’s Income
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