Budgeting for the Anti-Budgeter
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Have you tried budgeting in the past, and it hasn't worked for you? Read on for a new form of budgeting that's easy and quick, and works for the anti-budgeting folks.
Budgeting: a necessary, and difficult, task
Whether we like it or not, budgeting is a necessary component to financial planning. The first step in developing a financial plan is typically understanding your current cashflow – how much you receive in income and how much you spend, whether that spend is on expenses, debt paydown, or saving. You have to understand your budget, because how much you spend today has ramifications into almost every other aspect of your financial plan: retirement planning, whether you are saving enough for your financial goals, how you’re managing debt, and more.
But, budgeting can be a difficult task. It can be time-consuming, complicated and so detail-focused that we lose track of the big picture.
There are some types of budgeting that require tracking every dollar, using detailed spreadsheets or online tools like YNAB or Monarch Money. And some of my clients love these tools for the detail they provide!
For others who don’t like to budget at this level of detail, I've found a method of budgeting that my anti-budgeting clients find extremely practical and easy to use. It’s called Flow-Based Budgeting. Special thanks to Natalie Taylor who gave an amazing presentation on this topic at the XYPN Live 2023 conference I attended.
So if you struggle with traditional detail-oriented budgeting, read on – flow-based budgeting might be for you!
What is Flow-Based Budgeting?
This version of budgeting is all about the flow of your expenses. It factors in the timing of when your expense occurs, and whether the expense itself is a fixed standard amount or whether it’s flexible. It doesn’t require you to identify whether the expense is discretionary or necessary, or whether that Amazon purchase included clothing for the kids or toiletries.
At a high level, here's how it works. You separate your expenses into three categories. You’ll have a payment method and bank account associated with each category of expense. And you’ll pay some of your expenses on a weekly basis to keep you on track or give you a chance to make adjustments from week to week. You’ll also include savings in the budget for those bigger items that appear throughout the year and tend to derail a typical budget, like a veterinarian bill for your aging cat or the insurance premium you pay twice a year.
Here's a step by step process for you to follow if you'd like to try flow-based budgeting yourself.
Step 1: Create your flow-based budget.
Download your last 3 months of expenses from your credit card or bank account. Create a spreadsheet (or reach out to me for my template) and sort your expenses into the categories below.
Fixed: Paid monthly; stay relatively consistent from month to month. Examples: mortgage/rent; daycare; utilities; subscriptions and memberships.
Flex: Everyday spending, not on autopay, varies from month to month. Examples: medical copays, food, shopping, personal care, cash needs.
Nonmonthly
Boring, like insurance premiums paid once or twice a year; vet bills; auto repair; home repair; auto registration.
Fun, like birthday or holiday spend; weekend travel; gifts.
Goals: Annual savings required toward bigger financial goals like college, retirement savings (after you’ve already saved in your employer retirement plan), home improvement, or a big vacation. These goals should be estimated for the year, and then broken down into a monthly amount you need to save.
Sum up each category of expenses, and you’ll have your total monthly spend.
Next, compare the total spend to the total amount of net income you receive (net income is deposited to your bank account). You should have a positive number, meaning extra left over, or a negative number, meaning you spent more than your income. Does this match the amount leftover in your bank account each month, after you’ve paid for all the normal monthly expenses? If not, take another look at each section of your budget to be sure you’ve included everything.
Review the Nonmonthly and Goals sections of your budget. These are expenses that need to come out of your budget for the year, but the timing is unknown.
Step 2: Organize your bank accounts and how you pay.
Fixed and Flex expenses will each have their own bank account and payment method, so you can easily track each category.
Fixed Checking Account 1: Fixed & Paychecks
Paycheck deposited here.
Set up automatic payments for all fixed expenses that are paid monthly.
Flex Checking Account 2:
Identify your monthly Flex budget. (Say it’s $4,000 per month as an example)
From the monthly cost, calculate the budgeted weekly spend. (As an example, this would be $1,000 or $4,000 / 4.)
Set up automatic monthly transfer from Fixed Checking Account ($4,000 in the example). You can also set up a per pay-period transfer.
Pay all Flex expenses with a dedicated credit card.
Pay off the Flex credit card on Friday night with a reflection – did you spend more or less than your $1,000 budget?
Start over on Saturday morning, and try to spend appropriately next week.
Starting the week on a Saturday gives you a chance to make different spending decisions at the weekend where most people tend to make most of their Flex purchases.
Nonmonthly Savings Account 1
Identify your Nonmonthly budget.
Ideally, start with about 6 months of Nonmonthlies funded in this Savings Account.
Set up automatic monthly transfers from Fixed Checking Account.
This could also be funded through nonmonthly income – such as a bonus payout or cash gift from family.
Expenses can be paid any way you like.
When an expense arrives, transfer funds from this Savings Account into the Fixed or Flex checking account, depending how the expense was paid.
Goals Savings Account 2
Identify your Goals budget.
Set up automatic monthly transfers from Fixed Checking Account.
Note that depending on the goal, the optimal place to save might be a different account, not a Savings Account 2.
For example, college savings should be set up as automatic monthly transfers from Fixed Checking Account.
For home improvements or vacation savings, this Savings Account is a great place to accumulate funds.
Exclude savings in a workplace 401k or other pretax savings that come out of your paycheck before it is deposited to your checking account.
Expenses can be paid any way you like.
When an expense arrives, transfer funds from this Savings Account into the Fixed or Flex checking account, depending how the expense was paid.
Rainy Day Savings Account 3
This is a separate savings or money market investment account which maintains about 3 months of living expenses.
If you encounter a large unplanned expense, transfer funds from your Rainy Day savings account to pay for the expense.
If the above budgeted amounts were set up correctly, the Rainy Day account should rarely be needed except for unusual events.
Step 3: Monitor and Adjust Over Time.
This budgeting system permits weekly feedback on Friday nights with the Flex account. It’s ok if one week was expensive, because you can spend less next week and still hit your monthly target spend. Once it's set up, Flow-Based Budgeting can be an easy and quick way of managing your budget.
Like anything, you probably won’t get this right the first time. That’s ok. Just keep at it and make adjustments over time to the numbers.
After a few months, you will probably have landed at some numbers that accurately represent your regular spend. This is awesome because when it comes time to make a decision about a new expense, you'll know immediately whether you can afford it or not! Plus, you’ll gain a sense of confidence knowing you have a budgeting system that works for you.
So for all you anti-budgeting folks out there, what do you think? Does this seem like a form of budgeting that would be helpful for you? I’d love to hear your experience using this or another budgeting tool.