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Budgeting is tough. It isn't just figuring out what you've got coming in and going out. The bigger challenge is keeping up with the small fluctuations of day-to-day spending.

Sure, you can figure out how much to spend on rent and whether to take that vacation. Those big line-items fall into place surprisingly easily given how much of your spending they account for. What gets harder is keeping track of every trip to CVS (CVS) , every gallon of milk and every ride on Lyft  (LYFT) (not to mention the extra 20% tip that Square (SQ) wants you to pay on every job from butcher to baker to candlestick maker).

Making and keeping a budget has some challenges. But it's worthwhile, and the best place to start is with flexibility.

What Is a Flexible Budget?

There are two ways to look at a flexible budget.

Corporate Finance

In business, a flexible budget is one that you adjust based on changing costs and revenue. You build your budget at the beginning of the fiscal year, accounting for how much money your business has, needs and expects to make.

By flexing its budget a company can anticipate and (more important) accommodate its needs. For example, a seasonal business might create a flexible budget that anticipates changing staff levels as customers come and go over the course of the year. Or a company that conducts product development might allow for greater research investment in case of strong sales.

Personal Finance

The rest of this article will focus on the personal finance of flexible budgeting because… well, that's a lot more relevant to the rest of us.

A flexible personal budget is the individual equivalent of this process. In this case, you create a personal budget based on your finances, income, needs and expenses. Then you adjust it based on how your spending shifts over the course of the year. It's generally best to manage your budget on a monthly basis because this is how most billing cycles work.

A flexible budget requires more attention than a fixed one, but in the long run will be worth it. With a flexible budget you can shift your spending around in case of a fender bender or have a little more fun with some extra cash. More importantly, your spending will not be the same from one month to the next. If you buy a new pair of jeans in September, the odds are you won't need another in October. Not too many people buy a phone two months in a row.

Flexible budgeting allows you to adjust your savings and spending based on how you actually live your life, not based on a hypothetical sketch of how you should live it.

How to Create a Flexible Budget

Arguably. the hardest part of making a budget is accounting for all of the ways you'll spend your money. Do groceries count differently than coffee? Are clothes their own category, and what should you do with the one-off purchase of a James Patterson novel?

Start by Creating Categories

Everyone has a different approach. One good way to start is by simplifying.

Organize your spending into broad categories that you track more easily than a hundred little line items.

For example, create a "Daily Expenses" category. Then, under that, account for your groceries, coffee, metro tickets and all the other little things you buy on a day-to-day basis. Use "Entertainment" for your non-essentials like a bar tab, going to the movies, concert tickets and the like. "Shopping" will account for your one-off purchases, everything from electronics to books or a new jacket. The key difference is that Daily Expenses covers the things you buy routinely while Shopping covers the things you buy once.

Place your bills into the Monthly Bills category. This is the section that accounts for utilities, student loan payments, car payments and other fixed expenses that you can't easily modify. Housing should occupy its own category; for renters, it will likely have little more than "Rent."

Organize by Necessity

Next, separate your spending categories by the things you can change and the things you can't.

Your first section is your necessary expenses. These are fixed bills with little room for change (electricity, heating and internet for example). This also will generally include housing costs, not much month-to-month negotiating on your rent, as well as medical expenses and loan payments. Ideally you would like this section to account for less than half of your take home pay.

Your second section will include your expenses with room to move. This will generally include categories like the Daily Expenses for groceries and coffee, your transportation budget and shopping. These are the expenses that you can't cut out altogether but which you can adjust if need be.

Your third section is your unnecessary expenses. Entertainment will usually dominate this category. If you need to find money, you can take it out of the bar tab with no real impact on your life.

Finally, your fourth section is savings. This is the money that you'd like to set aside both for general savings and for any big-picture priorities. If you're saving up for a vacation, setting aside extra money for retirement or have dedicated an extra section of the budget to paying off debt, it will go here. If possible, you'd like this to come to about 20% of your overall budget. (This is known as the 50/20/30 approach. Half of your income to necessities, 20% to savings, 30% to everything else.)

Create Priorities

Now, identify your priorities.

A flexible budget is about more than just making sure you don't go into the red in any given month. It's about making sure you adjust your spending based on what's important to you. For example, perhaps you want to dedicate a specific amount to savings each month or are focused on ramping up your IRA. These will be the priorities that you fix your budget around.

Knowing your priorities will allow you to, essentially, solve for "X" in any given month. It will help you organize your spending based on what you want to achieve.

Track by Month

Once you've made your budget, the next step is to track it prospectively every month.

What you're looking to do is account for any unanticipated expenses that came up in the previous month, and to do so in a way that preserves your financial priorities.

For example, say that April came in $500 more expensive than usual. Your phone got broken and you needed to go buy a new one. You can account for that by flexing your budget to spend $500 less in May, making up for the unanticipated spending.

A flexible budget is about responding to new expenses (and new income) over time, so that in the long run your spending remains relatively consistent where it counts.

What Are the Advantages of a Flexible Budget?

Why make a flexible budget?

The biggest advantage to a flexible budget is that it more accurately reflects the state of your finances. The alternative, static budgeting, can't account for unexpected expenses or changing income.

A flexible budget will help you track where you can adjust spending each month. It helps you to work your budget around priorities. This is particularly important when you're hoping to build savings or work towards a larger financial goal. When you must adjust your spending on an ad hoc basis, most often you end up short-changing your savings.

A flexible budget also can help you to keep your budgeting lifestyle-friendly. When unexpected expenses crop up, it's easy to respond by pulling back from everything unnecessary in your life. By moving your money around you can see exactly how the numbers will work out, and can make sure to keep quality of life priorities from disappearing entirely.

What Are the Disadvantages of a Flexible Budget?

The biggest disadvantage to a flexible budget is that it does let you think of your finances as flexible. While this is more realistic, many of us benefit from rigidity when it comes to daily, healthy routines.

Getting yourself into the habit of never spending more than $15 on coffee every month or going to happy hour for exactly two beers might be an excellent way to stay on financial track. These simple routines can just work. Introducing flexibility can create confusion and break you from healthy patterns.

A flexible budget can be enormously valuable. Just make sure that you are actually using it to build good financial responsiveness, not using it to break good financial habits.

Example of a Flexible Budget

Let's start with an example of flexible budget in practice. We'll keep it broad. There's no need to get too deep in the weeds. To avoid complication we will use post-tax numbers.

Annual Income - $60,000

January Income - $5,000

• Salary - $5,000

January Expenses - $3,615

• Rent - $1,500

• Bills/Recurring Expenses - $1,015

  -The New York Times - $15

  -Phone Bill - $60

  -Electric Bill - $50

  -Cable and Internet - $60

  -Heat - $80

  -Student Loans - $750

• Daily Expenses - $600

  -Groceries - $250

  -Entertainment - $250

  -Transportation - $100

• Vacation Fund - $500

January Savings - Remainder

• Savings Goal - $1,000

In January we can put $1,385 into general savings, so we don't need to make any adjustments to hit our $1,000 goal.

Now let's say that in January we got into a fender bender. It cost $1,500, taking a huge chunk out of our monthly budget. Since this is a flexible budget, we can adapt and might adjust as follows:

February Income - $5,000

• Salary - $5,000

February Expenses - $4,365

• Mechanic From January - $1,500

• Rent - $1,500 (We can't adjust this.)

• Bills/Recurring Expenses - $1,015 (We also can't really adjust this without making a major quality of life adjustment.)

  -The New York Times - $15

  -Phone Bill - $60

  -Electric Bill - $50

  -Cable and Internet - $60

  -Heat - $80

  -Student Loans - $750

• Daily Expenses - $350 (Here we have some wiggle room by having a boring, stay-at-home month.)

  -Groceries - $250

  -Entertainment - $0

  -Transportation - $100

• Vacation Fund - $500 (We have some space here too by skipping our contribution to the upcoming vacation fund.)

February Savings - Remainder

• Savings Goal - $1,000

Note that, while we spent the mechanic money in January, we adjust our budget for it in February. This month we won't hit our savings goal but by flexing the budget we did manage to keep the car accident from putting us into the red. In fact, we still managed to contribute more than $600 to savings, or could take it a little easy and spend some money on entertainment.

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