In the wrong hands, budgeting can feel like homework. Who wants to painstakingly relive every single transaction they made for the month? And what good is having a budget if you only are aware that you exceeded it after the fact?
Enter Flex Budgeting, a system recommended by financial professionals for decades that artfully balances staying on top of your spending without requiring you to dedicate your life to reviewing your transactions every day.
This is different from “zero-based budgeting” that assigns every dollar a “job” and requires a more meticulous review process.
Also sometimes called “the one number budget”, "flow-based budgeting", or a “bucket” budget — Flex Budgeting is shorthand for a system that has evolved over decades to meet the needs of most people. In this article, Monarch Head of Advice and Certified Financial Planner® Pro Rachel Lawrence will share how Flex Budgeting works, how to get started, and some tips for sticking to the system.
Rachel has seen it work for the vast majority of the clients she and her colleagues have used it with over the course of her 20+ year career in personal finance.
Don’t worry, it’s simpler than you’d think.
The Four Types of Spending in Flex Budgeting
All your dollars are not created equal. Spending money on, say, keeping a roof over your head is a bit more important than ordering that sweet hoodie you were served on Insta. Flex Budgeting is about making sure you have your basics covered so you can confidently and presently spend your money. The four categories:
Fixed Expenses. These are the expenses and bills, whether necessary or just for fun, that are due every single month, like utilities and mortgages as well as streaming subscriptions or gym memberships.
Non-Monthly. Also called “periodic” or “sinking” expenses, these are costs that happen occasionally and are somewhat predictable. Think of travel, gifts, car maintenance, and activities for your kids. They can also include “unforeseen” but somewhat routine costs such as parking tickets.
Goals. This is money that you set aside for helping your future self. It can be paying down loans beyond the minimum payments, putting money into savings, or investing money so it grows for later.
Flex Expenses. Also known as “variable” costs this everything that is left over after the above categories are considered. This is the money that you can spend guilt-free provided the above three categories are taken care of.
“You can spend your Flex number on anything that you want,” says Rachel. “As long as you don't go over and you've already taken care of fixed, non-monthly, and goal expenses.”
Setting up Flex Budgeting
The most difficult part of the Flex Budgeting system is setting it up. You have to front load a bit of work in order to have a more hands off approach in the months to come. While we will describe the following steps in the context of Monarch, you can do this manually if you prefer.
Step 1: Gather all of your accounts
Take your previous three-to-six months of spending across all of your accounts. That includes bank accounts and credit cards — anything you use to spend money. See how to connect your accounts in Monarch here.
Step 2: Categorize your spending
Categorize or group every transaction as one of the four categories: Fixed, Flex, Goals, Non-Monthly. This will be somewhat time consuming but it will serve as the basis for your ongoing spending to ensure you make a budget you can stick to and don’t have to monitor with an eagle eye.
“Budgeting is not a precise exercise,” says Rachel. “It feels like it is because it's numbers and it's math. If you get overly precise with it, it's going to change tomorrow anyway. So I go for directionally correct.”
If you don’t have the time or patience to categorize all of your expenses, Monarch will automatically do this to a high degree of accuracy. It won’t be 100% (after all, my “flexible” expense may be your fixed expense) but it will do the job to get you moving quickly.
Step 3: Figure out your flex number
Average out your spending on Fixed, Non-Monthly, and Goals across the timeframe you used to categorize expenses. (For example, if you categorized 4 months of expenses, divide the total Fixed amount by 4. That is your Fixed number.) So let’s say…
Your after-tax income is $5,000 a month.
Your Fixed average is $2550/month
Your Goals average $500/month
Your Non-Monthly average is $350/month
That leaves $1700 a month for Flex spending. Divide this by 4.3 to arrive at a weekly amount, which is an easier timeframe for most people to stick to than monthly.
Step 4: Set up a way of protecting your flex money
Now that you know your Flex number, make sure you split your money in a way that makes it transparent and readily available. When your paycheck hits your account, have a process for setting aside your Flex money. Some options:
Create a separate no-fee checking account with its own debit card that the Flex amount is automatically transferred to once per week. This is our recommended approach.
Have a separate credit card. This is not recommended for beginners as you can easily eclipse your self-imposed weekly limit without noticing.
Withdraw your Flex amount in cash. Not practical for digital payments but a surefire way to ensure you are constantly aware of how much you have left to spend.
Add your flex money once per week to a prepaid debit card with low or no fees. This method allows forces you to stop spending when you hit your weekly limit but allows for digital payments as necessary.
Advice for Getting Started
You won’t get it right the first time.
You won’t think of everything when you categorize and some periodic expenses won’t be included in your transaction review. This is okay. Remember we’re going for “directionally correct”.
“We make too many transactions in our day to day life and spend too much on different areas for it to be perfect the first time around. So going in with eyes wide open, knowing it could take a few months for it to all shake out, the very first step always is a spending review,” says Rachel.
Review your setup every few months
There is no one-size-fits-all budgeting system. Many people make slight tweaks to the system such as allowing a weekly flex allowance versus a monthly or bi-weekly one.
Most people go through their spending and categorize expenses monthly or quarterly as their needs and lifestyles change. If you have a tighter budget you may have to review more frequently, such as weekly or daily, as you have less wiggle room for miscategorized expenses.
“Every single person I have worked with on budgeting does it slightly differently,” says Rachel. “There are billions of ways to manage your budget in your own finances. And you've got to find what works for you.”
