Fixed Budget vs. Flexible Budget: What’s the Difference and Which Is Right for You?

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If you want to get a better handle on managing your money, creating a budget should be the first step. You have choices in the type of budget you want to create. Fixed budgets and flexible budgets are well-known concepts in business accounting. But you can also apply these budgeting principles to personal finance and your own spending. Keep reading to learn more.

Fixed Budget vs. Flexible Budget: What’s the Difference?

A fixed budget is set based on a specific, predetermined amount of income. A flexible budget is based on varying income and expenses. Here’s a closer look at each.

What Is a Fixed Budget?

A fixed budget, as the name implies, is when income and expenses are both fixed and, typically, predicted for the year. It’s simple to create since it is always static.

A fixed budget will reflect the same income — or at least, a known amount — each month, and expenses that should also stay largely the same. You will create your budget in advance based on the prior year’s expenses, income or other known data.

As with your income, all expense categories of a fixed budget will also remain the same. Some examples of categories include:

• Rent or mortgage
• Utilities and other bills
• Birthday presents and holidays
• Minimum credit card payments if you are paying down debt
• Savings

A fixed budget may still have some flexibility. You could even create a category for discretionary spending. If you have funds left after you pay your fixed expenses and pay into savings and investment accounts, it can go into the discretionary spending category. This can go toward one-off events like shows or dining out.

It may be difficult to stick with a fixed budget, since unexpected expenses crop up. If you have a fixed budget, you want to have an emergency savings account or — at the very least — a low-interest credit card. This can help you cover emergency expenses such as unforeseen car or home repairs.

Pros and Cons of a Fixed Budget

When looking at the differences between a fixed budget and flexible budget, it is important to know the pros and cons. Here’s a look at the advantages and disadvantages of a fixed budget.

Pros

• Ensures you have enough money for necessities
• Keeps spending stable
• Simple to create, no guesswork involved

Cons

• Difficult to stick with
• May not account for financial emergencies
• Strict

What Is a Flexible Budget?

A flexible budget allows you to change how much you spend in various categories each month depending on your income. First adopted in businesses to increase spending for merchandise or raw materials when sales warrant it, a flexible budget accounts for variations in income and expenses.  

A flexible budget is best for freelancers, gig workers or people who work jobs where their hours and income vary monthly.

A flexible budget allows you to enjoy the fruits of your labor by permitting you to increase your spending in certain categories, such as groceries, dining and entertainment, as your income increases. You can also increase your savings and investments in months when you have extra income. In fact, it’s wise to boost your emergency savings account or increase your retirement savings in months when you have spare cash. You should also consider using any extra money to pay down high-interest debt.  

You can cut back on months that you don’t make as much. Your starting point for budgetary expenses should not exceed the smallest paycheck you would ever receive.

A flexible budget will still have many fixed elements. For instance, your mortgage or rent and utility or telecom bills will stay the same each month.

If you’re using a flexible budget, you want to be careful not to lose track of your budget and spend outside your means.

Pros and Cons of a Flexible Budget

Here are some advantages and disadvantages of flexible budgets.

Pros

• Allows for increased spending with increased earnings
• Can motivate you to work harder to increase your pay
• Take advantage of sales with flexible spending in categories like groceries
• Pay down debt faster

Cons

• Spending can easily get out of control
• Temptation to spend beyond your means
• If your income doesn’t meet predictions, you could come up short

Which Type of Budget Is Right for You?

If you have income that changes on a monthly basis due to sales commissions, side gigs or bonuses, a flexible budget could work for you. You’ll need the discipline to cut back, however, on months when your income is lower. You don’t want to rely on credit cards to maintain a higher income lifestyle in months you aren’t making that kind of money. Make sure the bulk of your extra income goes toward savings and investments.

If you have a fixed income or lack discipline to control your spending, you should create a fixed budget and do your best to stick to it. Again, any extra money you might come into, either due to increased earnings or reduced spending, should go toward savings.

Bottom Line

When considering the differences between a fixed budget and a flexible budget, it is important to remember your personal financial situation. Whether you choose a fixed budget or a flexible budget, keeping track of your income and expenses can help you on your path to financial freedom.

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