Making a budget, together with having an emergency fund that covers at least 3 to 6 months of monthly expenses, are the two fundamental pillars of well-managed personal finances.
And with a budget you will know where your money goes every month and that is something fundamental to control your money, know where you are spending more and where you need to strengthen your attention.
Techniques to develop a budget
There are many different techniques to develop a budget . Some are very simple, you only need a few minutes to do them but they are poorly detailed and do not show you a clear map of your situation.
On the contrary, other forms are quite complex, they require a dedication on your part of several hours a month but in exchange they provide a lot of information about your monthly financial situation . It is not the objective of this article to comment in detail on the characteristics, advantages and disadvantages of each type of budget.
What I want to comment, because I think it is really important, is that all different types of budgets have one thing in common.
And this point in common is that EVERYONE pushes you to divide your expenses into groups of different types of expenses, so you can carefully track where your money goes each month.
How much money you are going to allocate each month
In all of them, you must decide how much money you are going to allocate each month to a spending group . For example, how much money are you going to spend in the supermarket, how much money are you going to spend on lunch and dinner outside, or how much money you are going to spend on supplies (electricity, gas, telephone, etc.).
Then these groups can be smaller and more detailed or larger and group several concepts but you get the idea, right?
The main idea of any type of budget is that you should strive to determine an amount of money each month in each particular area of your life , making sure it is well covered.
Therefore, if you have to pay a mortgage of € 800 per month, you have to separate € 800 from your monthly income automatically to pay the mortgage. If you are going to spend € 250 on lunch and dinner outside per month, you have to automatically allocate € 250 of your expenses to this concept.
As you can see a budget is quite logical … except when it does not.
When a budget is not a useful tool
Note that while some monthly expenses are extremely fixed (the example of the monthly mortgage expense) others are not so fixed. They can vary greatly from month to month .
For example, your spending on lunch and dinner outside varies depending on whether you stay more or less with your friends or family or if you have more or less social events (birthdays, parties, etc.) And even the time of the year. In December-January, with the Christmas holidays this expense may be triggered.
To solve this problem with variable expenses, most budgets advise you to establish the amount you will spend depending on what you have spent during the previous months.
Specifically that you have an average of the expenses of the last 3 months , for example, and reduce it by 10%, since the idea is to save, and this problem is already solved.
Well, this does not work.
Each month may be completely different from the previous one. And the variability of spending each month can be much more than a simple 10% so the chances of making a budget like that and then not serving you at all are very high.
The flexible budget: a solution tailored to your needs
The real solution to this problem is to have a flexible budget . A rigid budget is not a reflection of real life.
Converting a traditional budget into a flexible budget is very simple. You just have to add a new type of expense, which you can call “flexible” or whatever you want, in your budget.
This new type of expense is 10% of the total expenses of your budget . That is, if for that month you have budgeted a total expenditure of € 3,000, the flexible expense will be € 300.
The objective of this new type of expenditure is to ensure that if a certain area of your budget does not meet the amount marked, do not panic and the budget does not go to waste.
If after the month, you have unused money from flexible spending, you can allocate this money to:
– Other areas of expenditure that you think you will spend more that month.
– To allocate it to an extra leisure as a reward for not having used it.
– Use it for savings and investment. What would be an extra savings or investment than usual.
This trick to make your budget flexible will make it much easier to stay within your budget and avoid getting nervous and overwhelmed when a type of expense is higher than usual during that month.
If you spend a month with your mobile, and the bill is higher, nothing happens because flexible spending covers this increase in the bill without problem.
And before finishing …
One last point. If you notice that every month a certain type of expense is always higher than what you had budgeted do not get used to using flexible spending to cover it .
What you have to do is analyze the reason you are spending too much and remedy it by reducing spending in that category.
If it’s hard for you to stay true to your budget, this little trick of converting it into a flexible budget will come in handy and make the whole process much easier.
If you have any questions or want to leave a question, do not hesitate to use the comments. We will answer you delighted.