Some people feel constricted trying to follow a budget. Keeping cash in separate envelopes makes them feel like they can’t have a life. It takes too much planning and too much rigid denial. They break their budget and sometimes wind up in serious financial trouble.
For others, having an inconsistent cash flow makes creating and keeping a budget difficult. Maybe they’re freelancers who work gig-to-gig. Maybe they’re in commissioned sales. Maybe their hours fluctuate from month to month. Whatever the reason, it’s hard to make a detailed plan when your bottom line changes every month.
The answer isn’t to give up on budgeting. It might just require a different approach to budgeting: cash-flow focus, the strategy used by most businesses.
Cash-flow budgeting is about flexibility. Businesses pay their fixed costs, and whatever is left is used to grow the business. You don’t have to write your unbudgeted spending purposes in stone. You don’t have to mess with cash envelopes or other strategies. You can spend when you have money and save for when you don’t.
You can manage your finances the same way. Just follow these four steps.
1. Automate your savings.
Even if you disregard everything else in this article, implementing this one tip can be life-changing. After you look at your monthly expenses and figure out how much of your income you can save, set up automatic transfers from your checking account to your savings to take the money out as soon as you get paid.
Like the saying goes, pay yourself first. When you automate your savings, you remove the money you saved from consideration. You can’t spend it; you’ve already spent it on savings. The importance of this kind of savings will become more clear once you see this budget in action.
2. Pay your needs and your priorities.
Fixed costs. Make a list of your essential expenses each month. Include your rent or house payment, your car loan and your utilities. Also include your student loan payments, your insurance and other necessary expenses. These are your “fixed costs.” They get paid after your savings contributions are made.
Growth expenses. Next, make a list of your priorities. Include your charitable contributions, vacation savings and retirement account contributions. These are your “growth expenses.” They get paid after your fixed costs.
If you don’t have enough money to make these bills, you don’t need a better budget. You need to lower those bills or increase your income. No amount of spreadsheet magic will change that bottom line.
3. Spend the leftovers.
This message may sound peculiar for personal finance advice. Remember, though, that you’ve already automated your savings. What you’re spending here is the leftovers – the extra that’s left at the end of the month.
Spend this money however you like – don’t worry about putting this much in entertainment and that much in travel.
This approach allows you to go out or indulge in a latte. You don’t have to worry about including it in your budget. Your spending habits might change as the month goes on, just like a business. If you know there’s a big outing before you get paid again, you may want to save some money for that.
4. Roll over what’s left.
If you have money left over at the end of the month, then you have more to spend the next month. If you have a month with slightly higher expenses, you can cover it from a previous month’s slightly lower expenses. Your spending will change from month to month, as might your income. So long as you keep the former smaller than the latter in the long run, you’ll be fine.