How to manage your flexible spending

damircudic/Getty Images

damircudic/Getty Images

Almost all financial experts agree that it’s important to have a budget and spending plan to keep track of your monthly expenses and help you keep your financial goals within reach.

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Most seem to be listening to that advice. Ten years ago, only about 40% of Americans had a monthly budget, but according to a recent survey, that number rose to nearly 86%.

There’s a higher risk of overspending when people don’t stick to the budget, but even if you do have one, there’s no guarantee you won’t overspend. It can be an easy trap to fall into, especially if you’re incorrectly budgeting for your flexible expenses.

What are flexible spending?

Expenses are divided into two buckets, fixed and flexible.

Fixed expenses are those that typically stay the same month after month: rent or mortgage, car payments, streaming services, etc. Flexible expenses (often called variable expenses in accounting) are those that fluctuate from month to month, such as groceries, dining out, or entertainment.

Both types of expenses must be accounted for. It’s fairly simple to control fixed expenses, but without careful planning, flexible expenses can easily wreck a budget and jeopardize your financial goals.

If you constantly find yourself in a bind despite having a budget to stick to, consider reassessing your plan to make sure you’re managing (and minimizing) your flexible spending.

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Dig into your spending history

Before you can design a plan to manage your flexible expenses, you need to identify them.

If you don’t know how much you spend on these expenses each month, it’s time to start digging into your past. You’ll probably want to look at at least three to six months of costs; remember, these fluctuate, so a month may or may not be representative of your average spend over time.

For example, you might be budgeting $500 for food, but you actually spend $750 after factoring in restaurant bills for delivery or dining out. Paying attention to the expenses you pay out-of-pocket is also critical to accurately tracking what you spend over a given period. Once you know your average, you can budget accordingly.

Identify needs vs. Wants

Some flexible expenses, like food and gas, are simply necessary, that’s a necessity. Your wants are those things that are nice to have, but not essential. If you can eliminate or reduce some of these minor costs from your budget, your cash flow could improve considerably.

Review your bank and credit card statements to assess whether each expense is a necessity or a luxury. Look beyond the obvious: Everyone has heard some variation of the “skip your fancy coffee” or “pack your lunch” routine, but how often do you go to the hairdresser or salon? How often do you wash your car? Are you paying someone to do something that you could probably be doing yourself? Some comforts can be hard to let go of, but they can pay off big in the long run.

Use the “envelope” system

We’ve already seen that overspending is quite common even if you’re using a budget. Most of the time, we’re just not paying close attention to what we’re spending, especially if it’s something mundane and frequent like groceries.

A budget trick that many people prefer for their fluctuating costs is called the envelope system. It’s been around for a while, and it’s very simple. Let’s say your monthly budget for dining out is $150. Every month, I would put $150 cash in an envelope marked “dining out” and when it’s spent, that’s it. You do this for every budgeted expense and then you’re guaranteed not to overspend, at least not by accident.

Obviously, these days there isn’t much point in having a bunch of envelopes full of cash to keep track of, but that doesn’t mean you can’t follow the system in spirit. Using an app like Goodbudget, you can still allocate your money to “envelopes” for your spending each month.

Convert Flexible Expenses to Fixed

Other things being equal, the fewer flexible expenses you have, the easier it is to manage your money. So it’s a good idea to see if you can turn a flexible expense into a fixed expense.

An obvious example of this is your utility bills, which are likely to fluctuate seasonally, making them difficult to budget for. Maybe your electric bill is low from September to May, but spikes from June to August when it’s hot. On the other hand, your gas bill can be negligible in the summer but deadly in the winter.

Your utility company may offer a plan to help keep your payments predictable, often known as a fair payment plan or budget billing. To even out your costs throughout the year, utility companies charge a fixed monthly amount based on the prior year’s usage. At the end of each year, the company reviews your account to determine the next year’s payments. If you have a year-end balance, it is included in your recalculation.

A predictable monthly fee can go a long way in keeping your budget in check.

Track irregular expenses

Everyone has unexpected costs that arise from time to time. Some costs are predictable but do not follow a set schedule. Don’t forget to include annual or one-time expenses like property taxes, car maintenance, back-to-school shopping, and wedding gifts as part of your flexible spending.

It can be hard to remember to include these oddballs in a monthly budget when they don’t happen regularly. A useful trick can be to add everything up for a full year (or estimate as best you can if you don’t have that much track record). Then divide that number by twelve to get a monthly cost. By including it in your budget each month, it’s much easier to make sure you’re setting aside enough money to take care of those one-offs.

Flexible spending is unpredictable and can upset anyone’s spending plan. But managing these costs is easier than you think. The secret is to identify them, remove the ones you don’t need, and be creative with how you prepare for them.

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Valencia Higuera contributed reporting to this article.

This article originally appeared on How to Manage Your Flexible Spending