One Million and Beyond

The Fluid Budget

By Matt - Friday, July 31st, 2009

Budgeting by definition means allocating a certain amount of money for a task or activity; it is an estimated or planned amount of spending for whatever category you decide. In my opinion the whole budgeting process is always a work in progress because when you create the budget there will be unknowns that you simply can’t account for.

This past week I recieved a comment from a reader that indicated that once you reach the budgeted amount of money spent on something that’s it you can’t spend more. This user challenged my budget creation process and I wanted to pause and think about it. My initial reaction was to get a bit defensive but after a moments pause I started questioning my budgeting process and approach. The reality is that when you create your budget this is your planned or ideal spending for the week and not the reality.

A budget can’t be static

If you did the same things every week and absolutely nothing changed from week to week then you could simply create a budget and stick to it exactly. But in that situation there would be little need for a budget because once you created one budget you would never need to do another one. Life is a series of changes and no two days or weeks are the same so when you create your budget you have a set of expenses in mind there will be circumstances that force you to sepnd differently than initially planned.

The perfect example of this would be the food budget for the week; if you plan on spending lets say $100 but when you get to the store it turns out that your groceries cost you $105. Do you put something back to make the amount exactly correct? If you’re trying to save money and be very concious of your spending then you might. But on the other hand if you need all $105 of food in order to feed yourself would you put something back and go hungry? Personally I would spend the extra money because I don’t want to go hungry and if necessary I can find the extra $5 from a different category.

Circumstances will dictate what you need to spend your money on and those will in all likelihood be different at the time you make your purchase than when you were coming up with your budget. There has to be a certain amount of flexibility in your budget in order to account for the changing circumstances of life.

Changing your behaviour to meet your budget

For me the goal of budgeting is to help me change my behaviour in orderr to not overspend and to know where my money is going. The commenter challenged the fact that I overspent on a vice (alcohol); he was 100% right to challenge my overspending. If I say I’m going to spend $65 on alcohol then I should do everything I can to stick to that amount rather than spend double even if it means I should change my behaviour to accomplish this.

If you intend to stay on budget you need to make concious choices to remain within what you were planning to spend. So going back to the grocery example if you intend to spend $100 on groceries for the week and the cashier rings up $105 and there is $10 in items that you want but don’t really need (say chocholate bars and chips) then you should take those items out to remain on budget. Adjust your behaviour to stay on budget.

In my particular case the month of July was more for understanding how and what I spend my money on in order to create an accurate budget. Do I need to spend as much money on unnecessary items such as alcohol and smokes? No I don’t but I am also not in a situation where hurt my financial situation by spending the money (though I don’t improve it either). This week I am actually making a concious effort to remain within what I’ve allocated for each category; but even then in my opinion a budget needs to have some flexibility.

The Fluid budget

My personal take on the buget is that it needs to be fluid. If you intend to spend a total amount of $1000 for the week then you should not go above that amount, but if you spend more or less than you planned in each specific category is not nearly as important. You need to adjust your spending to make sure that overall the budget is maintained so an extra $5 spent on food should translate to $5 less spent in another category. This type of flexibility allows you to deal with situations without any added stress. You might forget that the baby will need diapers in a given week but spending less on gas, food and miscelaneous items can let you cover the cost without any negative impact.

As long as you are living within your means having fluidity in your buget makes perfect sense and in my opinion helps you keep the stress that’s often associated with money down.

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