Personal Finance

Your Budget Sucks

So here’s a better way.

Quick Note: Jump to the bottom of this article to download my budget spreadsheet so you can build your very own flex budget, or visit the site.

Also, special thanks to Ramit Sethi who inspired this budgeting method.

I’ll cut to the chase.

Humans are unpredictable. As much as we may think we’re disciplined, orderly, and consistent rule-followers…we aren’t.

Sometimes we take the long way home, just because it’s a beautiful night and we wanna go for a drive. Sometimes we have an extra slice of pizza because dammit, I deserve it. And sometimes we ignore our budget and treat a friend to dinner just because they had a rough week.

And all of this is okay.

Your budget is predictable. But you aren’t.

The fundamental problem with most budgets and budgeting tools is they assume that we are strict, and we are routine, and we are habitual.

Designating a fixed amount of spending per month for groceries, clothing, restaurants, or gasoline seems like a good idea on paper, but it’s just wishful optimism.

Look…life happens, and spending changes. But it’s not like we’re doing it on purpose! The problem is that there are too many rules to follow, too much mental math, and too many damn receipts.

Monitoring your spending with a magnifying glass might work for some people, but if you ask me, it’s too much work. It’s my money, and I’m gonna spend it however I damned well please, thank you very much.

So how do you build a budget that’s both responsible and flexible?

I’m glad you asked.

Introducing: The Flex Budget

Note: For simplicity, use your NET paycheck amount. That is, the exact number shown on your paycheck after taxes, deductions, and things like 401k.

The Flex Budget divides your hard-earned money into three basic categories:

• Recurring Expenses: Money for bills
• Savings: Money for saving
• Flexible Spending (or “Flex”): Spending money for everything else

Each time you get paid, your money should be distributed into these three buckets. Ideally, your employer supports direct deposit, and allows you to define specific amounts of money to be deposited into one or multiple bank accounts. It’s best to have a separate bank account for each category. This is extremely important.

Flex budgeting operates on the out-of-sight-out-of-mind principle. That is, the less you know your money exists, the better. The sooner you get your money into savings, then it’s more likely you’ll never touch it.

However, if you keep all of your money in a single bank account, you’ll spend the rest of your life doing mental math gymnastics to figure out how much you’re “allowed” to spend, how much you need to save for your upcoming electric bill, and how much is set aside for holiday gifts.

So how do you figure out how much money goes into each bucket?

Let’s find out.

Recurring Expenses

The important word here is recurring. These expenses are regular, repetitive, and for the most part, unchanging. Sure, purchasing groceries might feel like a recurring activity throughout the month, but the amount you pay at checkout varies wildly each time.

Recurring expenses happen regularly, but might happen at different intervals (monthly, quarterly, semi-annually, or annually).

Monthly Bills

These are billed once month and are the most common type of expense. Rent or mortgage, utilities, and car payments are all pretty typical monthly expenses, but don’t forget about credit card payments and loans (like student loans). If you’re not already, you should definitely be making regular monthly payments toward debt, and if you include them in your expenses list, you won’t ever forget. And before your know it, they’ll be paid off!

Examples of monthly bills are:

• Mortgage/Rent
• Utilities
• Car Payment
• Insurance
• Daycare
• Child Support
• Student Loan Payments
• Credit Card Payments
• Internet and TV
• Cell Phone
• Debts and Loans
• Netflix/Hulu/HBO
• Spotify/Apple Music
• Subscription Boxes (Dollar Shave Club, Blue Apron, etc.)
• Magazines

Irregular Bills (and expenses)

Irregular bills are still recurring expenses, but happen at different intervals. Car registration, for example, is a once-a-year expense that you should be budgeting for so it doesn’t surprise you when it comes around. Depending on the amount and billing interval, saving for these irregular expenses is usually only a couple dollars from each paycheck, so you won’t notice a huge difference.

Examples of irregular bills are:

• Car Registration (once a year)
• New Tires (about every two years)
• Oil Changes (for me, roughly every three to four months)
• Certain Print Subscriptions (quarterly or once a year)
• Holiday Gifts (once a year)

Why are holiday gifts considered a “bill” instead of savings?
I personally like to treat holiday gifts as a bill because I never touch money that goes into my expenses account. If I treated holiday gifts as “savings” money and it went in with other savings goals, I probably wouldn’t be as strict with myself to not spend it before the holidays. It’s really just a mental thing for me.

Adding It All Up

Figuring out how much you need to save from each paycheck for bills and expenses is a little tricky because you have to consider how frequently you get paid, and how frequently those bills are due. Here’s an example:

New Tires - $600 (every two years)
If you get paid twice a month (24 times per year), then you’ll need to save $12.50 each paycheck. That’s $600, divided by 48 paychecks, or $12.50.

It takes a little bit of trust to get used to, because each paycheck, you’re not saving for the entirety of your bills because it’s divided across the month. Let’s pretend you get paid twice a month on the 1st and the 15th, and your total expenses due each month is $1,500. Since you get paid twice a month, you’ll need to save $750 from each paycheck ($1,500 divided by 2).

By saving money little by little, over time you’ll eventually have the money saved up for those regular, yet irregularly-occurring expenses.

Savings

Saving money is hard. I’m won’t pretend like it isn’t. It’s kinda like setting out appetizers for a house party and forcing yourself to not eat half the bowl of chips and salsa before your guests arrive. It’s just sitting there not getting eaten, so why wouldn’t I touch it?

There are all sorts of things you can (and should) be saving money for:

• Emergencies (employment, medical, home improvement, etc.)
• Vacations
• A home down payment
• A wedding
• A new car

For the sake of simplicity, I’ll treat all of these goals as a single Savings bucket, but it’s not a bad idea to have multiple accounts for each savings goal to help you track your progress.

So how much can you save?

The Flex Budget is simple because every dollar you don’t need for expenses or flexible spending just goes straight into savings.

Now, it takes some discipline to not touch this money, but the more inconvenient you can make it to access this money, the more protected it’ll be from your sticky fingers.

I like to keep my savings in a high-yield savings account (2.1% interest), so it actually makes me a little bit of extra money while it sits there. It usually takes about 5–7 business days to transfer any money in or out of it, and this inconvenience helps stave off any impulse purchases.

To figure out the exact amount you can put into your Savings bucket, let’s talk about your Flex spending.

Flexible Spending

Flexible spending is the absolute crux of this budgeting style. As we talked about earlier, your spending is always fluctuating, and you’re going to drive yourself crazy looking for purchasing patterns. Outside of regular expenses, they just don’t exist.

This bucket is different from expenses and savings because of its irregularity and unpredictability.

The flex bucket doesn’t punish you, and it doesn’t judge you.

You are completely free to spend it however you want. It treats you like a responsible adult, because you are perfectly able to make your own decisions. If you want to spend your entire paycheck on a new pair of shoes, that’s your prerogative.

The only rule about money in your flex bucket is that once it’s gone…then it’s gone.

You can’t pull money from your expenses bucket because it’s already assigned to various bills, and you can’t pull money from savings because it’ll distance you from those goals.

I highly recommend auto-depositing this flexible spending money onto a single debit card each time you get paid. Having this money in a single account makes it simple to track…there’s only ONE number you have to watch, and it tells you exactly how much money you have left to spend until your next paycheck comes.

Here are some things you might pay for out of your Flex bucket:

• Groceries
• Restaurants
• Going to the Movies
• New Shoes
• Flowers for Mom
• Clothes
• Makeup

Study this list. It’s important to understand why these kinds of purchases are different from recurring expenses. These are very dynamic. Unless you eat the same peanut butter sandwich for every single meal, you can’t possibly budget so specifically for things like groceries.

Instead, the flex budget provides you a lump sum of money from each paycheck that you can freely spend however you damn well please.

It’ll probably take a couple of pay cycles to figure out your “flex number”. This is the amount of money you pay yourself each paycheck for free spending.

My flex number is about $500 per paycheck.

To help give you a starting point, I’m unmarried, living in the city, go out to restaurants a couple of times per week, and treat myself to some shopping maybe once per paycheck. My flex number is about $500. That means each paycheck, I auto-deposit $500 onto my debit card and use it for everything from groceries to restaurants to shopping.

I check the balance of my flex debit card daily, and adjust my spending accordingly. If I have a high-spending weekend, I’ll slow down my spending during the week. If I’m planning a date night, I’ll make sure to be a little more frugal leading up to it.

When my flex account reaches $0.00, then I just have to wait until I get paid again. It sounds scary, but watching your flex account balance diminish over time will keep your spending in check.

Putting it all together

Congratulations, you’ve learned the basics of Flex Budgeting! Let’s recap what we’ve learned:

Recurring Expenses

• Happen on a regular cadence (monthly, quarterly, annually, etc.)
• Includes debt payments for things like loans and credit cards
• Don’t include groceries, restaurants, or other irregular expenses

Savings

• Every dollar that isn’t for Expenses or Flex goes to Savings!
• At minimum, you should have an emergency savings account

Flexible Spending

• The amount of money you’re comfortable with each pay period
• Used for things like groceries, restaurants, shopping, entertainment, etc.
• Can be spent on anything you want
• Should be put onto a debit card (or withdrawn in cash)
• When it’s gone, it’s gone. You have to wait until your next pay period!

Now what?

I did all the hard work for you and created a Flex Budgeting Worksheet that you can use to document your expenses, plan your savings, and calculate a flexible spending allowance for you and your family.

Grab the worksheet or watch the tutorial below!