Just about every financial expert agrees that it’s important to have a budget and spending plan to track your monthly expenses and help you keep your financial goals within reach.
Most seem to be listening to that advice. Ten years ago, only about 40% of Americans had a monthly budget, but according to a recent survey by Debt.com, that number has increased to almost 86%.
There’s a greater risk of overspending when people fail to budget, but even if you have one there’s no guarantee that you won’t spend too much. It can be an easy trap to fall into, especially if you’re budgeting incorrectly for your flexible expenses.
What Are Flexible Expenses?
Expenses fall into two buckets, fixed and flexible.
Fixed expenses are those that typically stay the same month over month – your rent or mortgage, car payments, streaming services, and so on. Flexible expenses (often called variable expenses in accounting) are those that fluctuate month over month, like groceries, dining out, or entertainment.
Both types of expenses need to be accounted for. It’s fairly simple to get a handle on fixed expenses, but without careful planning, flexible expenses can easily wreck a budget and jeopardize your financial goals.
If you’re consistently finding yourself in the hole despite having a budget to follow, consider reevaluating your plan to make sure you are managing (and minimizing) your flexible expenses.
Dig Into Your Spending History
Before you can devise a plan to manage your flexible expenses, you have to identify them.
If you don’t know how much you’re spending on these expenses each month, it’s time to start digging into your past. You’ll probably want to examine at least three to six months of costs – remember, these fluctuate, so one month may or may not be representative of your average spending over time.
For example, you might be budgeting $500 for food but actually spending $750 after taking into account restaurant bills for delivery or dining out. Paying attention to expenses you pay with cash is also critical to accurately tracking what you spend over a given period. Once you know your average, you can budget accordingly.
Identify Needs Vs. Wants
Some flexible expenses, such as food and gasoline, are simply necessary – that’s a need. Your wants are those things that are nice to have, but not essential. If you can eliminate or reduce some of these less important costs from your budget, your cash flow could improve considerably.
Comb through your bank and credit card statements to assess whether each cost is a necessity or a luxury. Look past the obvious – everyone has heard some variation of the “skip your fancy coffee” or “pack your lunch” routine, but how often do you go to the barber or salon? How often do you get your car washed? Are you paying someone to do something that you could probably be doing yourself? Some comforts may be hard to part with, but it can pay off big in the long-term.
Use the “Envelope” System
We’ve already seen that overspending is pretty common even if you use a budget. Most of the time, we just aren’t paying that close attention to what we’re spending, especially if it’s something mundane and frequent like groceries.
One budgeting trick that many people favor for their fluctuating costs is called the envelope system. It’s been around a while, and it’s very simple. Let’s say your monthly budget for dining out is $150. Each month, you would put $150 cash in an envelope marked “dining out” and when it’s spent, that’s it. You do this for every budgeted expense, and then you’re guaranteed not to overspend – at least not by accident.
Obviously, these days it doesn’t make much sense to have a bunch of cash-stuffed envelopes to keep track of, but that doesn’t mean you can’t still follow the system in spirit. Using an app like Goodbudget, you can still allocate your money to “envelopes” for your expenses each month.
Convert Flexible Expenses to Fixed
All other things being equal, the fewer flexible expenses you have, the easier it will be to manage your money. So, it’s a good idea to see if you can convert a flexible expense into a fixed expense.
An obvious example of this is your utility bills, which probably fluctuate depending on the season, making them tricky to budget. Maybe your electricity bill runs low from September to May but shoots up from June to August when it’s hot out. On the other hand, your gas bill might be negligible during the summer but a killer in the winter.
Your utility company might offer a plan to help keep your payments predictable, typically known as an equal payment plan or budget billing. To even out your costs throughout the year, utility companies charge a fixed monthly amount based on your previous year’s usage. At the end of each year, the company reviews your account to determine the next year’s payments. If you have a year-end balance, it’s included in your new calculation.
A predictable monthly rate can do a lot to help keep your budget on track.
Track Irregular Expenses
Everyone has unexpected costs that pop up from time to time. Some costs are predictable but don’t follow a set schedule. Don’t forget to include annual or one-time expenses, such as property taxes, car maintenance, back-to-school shopping and wedding gifts, as part of your flexible expenses.
It can be hard to remember to include these oddballs into a monthly budget when they don’t happen on a regular basis. One useful trick can be to add everything up for a full year (or estimate as best you can if you don’t have that much history). Then divide that figure by twelve to get a monthly cost. By baking it into your budget each month, it’s much easier to make sure you are setting enough money aside to take care of one-offs.
Flexible expenses are unpredictable and can throw a wrench in anyone’s spending plan. But managing these costs is easier than you think. The secret is identifying them, eliminating those you don’t need, and getting creative with how you prepare for them.
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Valencia Higuera contributed to the reporting for this article.