There is no set flexible budget formula, and that’s the point. Your budget shouldn’t be set in stone. But how do you make your budget flexible?
Here’s how.
One of the great benefits of budgeting and saving up is that it brings you peace of mind. But that peace of mind evaporates when you get too rigid with your budget.
A rigid routine puts constant pressure on your nerves and becomes a burden rather than a relief. That’s why it’s important to keep a balanced approach to your budget. Not too rigid that you just can’t relax. And not too flexible either that you keep getting into trouble.
So, what is the formula for creating a flexible budget? I’ll come to that, but let’s first understand a flexible budget vs. a rigid budget.
What Is A Flexible Budget?
A flexible budget is simply one that adapts to your changing needs and lifestyle. It helps you grow while keeping your sanity intact.
Obviously, you create the budget and set the rules for yourself. It is up to you to make changes to your budget as it suits you at any point in time. It should accommodate your changing goals and give you the flexibility to work towards newer challenges.
What Is A Rigid Budget?
A rigid budget must be followed to the last penny. Not a single dollar should be spent out of place. It is just as hard to follow as it is to create. Unless you are a highly disciplined person, you will have trouble being so rigorous.
Sometimes, when people create a budget, they think the only way to make it work is by following it strictly. Even if it is driving them crazy trying to do so. They think, what’s the point of the budget if you are not going to follow it.
The thing is, yes, you do need to follow your budget, but you can also change it if it’s not working for you. It has to work for you and not the other way round.
An example of a rigid budgeting system is the ‘Envelope Method,’ where you allocate a sum of money to different categories. You only spend the exact or less amount allocated to each category.
For instance, suppose your weekly budget for groceries is $100. You can’t spend more if you need to unless there is leftover money from another category for that week.
The envelope system is great for short-term goals and helps you stay focused on your targets. But it isn’t the most practical approach for most people and can easily demotivate someone out of budgeting.
How Flexible Should Your Budget Be?
As I said before, your budget should be flexible enough to adapt to your changing requirements. As Mandi Woodruff-Santos of the popular podcast ‘Brown Ambition’ puts it, “You’re a human whose lifestyle changes, so let’s account for that.”
You will need to get a cup of coffee, sit down and evaluate your lifestyle. Think about your needs, your saving goals, and areas where you would like to splurge a little every now and then.
Your needs constitute food, utilities, rent or mortgage, clothing, fuel costs, etc. Your wants include expenses such as entertainment, traveling, or sports. And your saving goals include financial milestones and debt payments.
Write down all your needs and wants and see what percentage of your income covers those expenses. Put the rest away for savings.
Alternatively, you can decide how much you need to save each month for a particular saving goal or debt repayment. You can first put aside this amount and divide the rest between needs and wants. This is also called the “pay yourself first” approach. In this way, you will create your own flexible budget formula.
You will also need to revisit these allocations quarterly or every six months to accommodate any changes or new goals.
If you have any new milestones or expenses to add (like a study course), don’t hesitate to adjust your budget for new requirements. After all, your budget is there to serve your needs the best way possible. That will keep your budget flexible, practical, and relevant for you.
How To Create A Flexible Budget?
One of the most easily adaptable flexible budget formulas is the 50/30/20 budgeting rule. Where 50, 30, and 20 are percentages from your income that you allocate to different categories. As per the rule, you would spend 50 percent on your needs, 30 percent on your wants, and 20 percent on savings and debt repayment.
Remember that these numbers are only relative, and you can modify them according to your income. So, for example, suppose you can cover all your needs pretty well within 40% of your income. Then you can put the same amount into savings. Hence, your formula will be 40/20/40.
Or maybe you don’t have so many wants, then you can allocate only 10 or 15% to your wants. The rest can go to other categories. So, for instance, it could be 50/15/35.
Another must-to-do thing is to build up an emergency worth at least three to six months. This will keep you covered from any unseen big expenses that can put a dent in your monthly budget. And you won’t have to make any major adjustments to your budget.
If you want to learn more about creating an emergency fund, you can read through ‘Why do you need an Emergency Fund?’ Here I explain all there is to know about an emergency fund.
