Financial experts often recommend that people create a budget and spending plan to track monthly expenses and keep financial goals within reach. Yet few seem to be listening. A 2014 study by the National Foundation for Credit Counseling found that only two in five adults, or 39 percent, have a budget and monitor their spending.
There’s a greater risk of overspending when people fail to budget. Then again, being a budget-stickler doesn’t guarantee stellar results either, especially if you’re budgeting incorrectly and forgetting to add in flexible expenses.
What are Flexible Expenses?
Fixed expenses and flexible expenses should be part of every budget. Yet some people only include their fixed expenses — rent or mortgage payment, car payment and cable TV bill, in other words, costs that typically remain the same from month-to-month — when preparing a budget. These expenses, however, are only part of the equation. Without careful planning, flexible expenses, which typically fluctuate, can subtly wreck a budget and make it difficult to get ahead financially.
If you’re always in the hole or robbing Peter to pay Paul, consider reevaluating your budget plan to include flexible expenses like groceries and entertainment costs, and quarterly bills like insurance premiums, or annual expenses like property taxes.
1. Become a Financial Sleuth
Before you can devise a plan to manage your flexible expenses, you have to identify these costs. If you don’t know how much you’re spending on flexible expenses each month, start digging into your financial past.
Steve Repak, a certified financial planner (CFP) and author of “6 Week Money Challenge For Your Personal Finances,” said people may need to go as far back as six months to figure out their food-related costs if they fluctuate considerably.
“Review your previous bank statements and see exactly what you’ve spent on food-related expenses for the entire month,” he said. “If you spent a total of $450 on food-related expenses, that comes out to be about $112.50 a week.”
It’s possible you’re budgeting $300 for food but actually spending $500 after taking into account restaurant bills for lunch and dinner. Keeping a diary of the expenses you pay with cash, such as restaurant bills and grocery purchases, can help you accurately track what you spend over a given period. Once you know your average, you can budget accordingly.
2. Identify Needs vs. Wants
Some flexible expenses, such as food and gasoline, are necessary. But if you can eliminate less important costs from your budget, such as car washes or maid services, your cash flow might improve considerably.
Comb through your bank statements to assess how much you’re spending and what you’re buying. Then ask yourself whether each is a necessity or a luxury.
“Your needs are the absolute essentials. Your wants are not things that you have to have, but you desire to have anyway,” said Idowu Koyenikan of Grandeur Touch, a business strategy consulting firm in Raleigh, N.C. “Going through the lists of your wants is an excellent place to save money and decrease your expenses. Eliminating some of your wants will help you free up money.”
3. Use the Envelope System
If you’re keeping funds allocated for fixed and flexible expenses in the same pot, things can get messy. For instance, perhaps you decide to spend $80 a week on groceries. If you’re paying with a debit card, you might be tempted to spend more. To counter that, consider using budgeting tools to make managing your flexible expenses easier.
Many people favor the envelope system for costs that fluctuate like groceries, gas and entertainment. Every week, they put a set amount of cash in three envelopes and only spend what’s inside — nothing more, nothing less.
For those wanting a more tech-savvy approach, the Level Money app is an electronic equivalent of the envelope system. The app updates your cash flow so you always know what you can spend across different categories.
4. Convert Expenses
The fewer flexible expenses you have, the easier it might be to manage your money. So convert a flexible expense into a fixed expense.
For example, electric and gas bills fluctuate depending on the season so they become tricky to budget. Maybe your electricity bill runs low from September to May, but shoots up from June to August amid hotter temperatures. Similarly, your gas bill might be manageable during the summer but a killer in the winter.
Your utility company might offer a plan to help keep your payments predictable, known as an equal payment plan. 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 flat rate can keep your budget on track.
5. Track Annual Expenses
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.
“One of the top mistakes I see people make is failing to budget for irregular expenses — not unexpected expenses, but those that come up on a strange schedule — like annual tax payments or quarterly insurance payments or the once-every-10-year passport renewal,” said Stefanie O’Connell, a millennial finance expert and founder of TheBrokeandBeautifulLife.com. “I try to build those expenses into my budget by estimating the annual cost, then dividing by twelve.”
Based on what you can afford and what you’ve spent over the past year, set cash aside for infrequent flexible expenses. This is separate from cash you allocate for retirement or emergency funds. If you can save $50 a month, that’s $600 a year for costs that occur outside your regular budget.
Flexible expenses are unpredictable and can throw a wrench in your entire spending plan. But managing these costs is easier than you think. The secret is identifying these costs, eliminating those you don’t need and getting creative with how you prepare for these expenses.