Fixed Expenses and Flexible Expenses: How to Budget for Both
Published on - March 23rd, 2010 (by Sierra Black) This post is from new staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com.
A few months ago, my local bank and I had a falling out and my husband and I were suddenly very motivated to switch banks. We’d narrowed it down to two choices:
- Citizens Bank, which has a local branch where I can deposit the cash and many small checks I receive in the course of running my business, or
- ING Direct, where we already had a high-interest savings account.
Then I had a crazy idea. An idea so crazy it just might work. And it has — beautifully — for the past three months. Why not use both?
.jpg "Turn your bank into your personal assistant!")
We could use one account for our day-to-day flexible expenses like grocery shopping, and another to pay our fixed bills, like the mortgage and utilities.
We went ahead and set up a new checking account at the local branch of Citizens Bank, but we also opened our ING checking account. Then we did something we really should have done years ago.
Fixed and flexible expenses
We sat down one night with all our financial records for the past year and worked out what our fixed expenses are: our mortgage, our utility bills, our debt payments. For the first time, we went past the monthly stuff and tallied in the quarterly and annual fixed expenses; those budget-busting surprises that are actually regularly scheduled expenses, like annual insurance premiums and the excise tax for our car.
My husband plugged all these numbers into a huge spreadsheet that eventually spit out a number: the number of dollars we needed to budget every week to pay our fixed expenses and meet our savings goals.
Happily, that number was smaller than the number of dollars we earn each week. What remains, whether we like it our not, is our flexible expense budget: the money we use to pay for everything that isn’t committed to a regularly scheduled bill.
That includes groceries and gas, not just fun stuff like birthday gifts and dinners out. Yes, we need that stuff, but it’s not money that has to be spent in a specific place, on a specific day. That makes it a flexible expense.
I’ve struggled with budgeting for years. I love the balanced money formula, but when I apply it to my own life, I get stuck on figuring out what’s a need versus a want.
With a fixed vs. flexible split in my expenses, it doesn’t matter. I may need groceries and merely want auto insurance, but that car insurance bill is due on the 15th regardless of my priorities. If I don’t have enough money to cover my flexible needs, I need to cut back on my fixed expenses somewhere.
Once we had those numbers, we set up our finances between the two checking accounts like this:
- My husband’s direct deposit goes into our local bank account, where I deposit all my little checks and cash payments as they come in.
- Once a week, the amount of our fixed expense budget is transferred from our local checking account to our ING account.
- All of our recurring, fixed expenses are automated to pay out of that account.
- All of our flexible spending for things like groceries and entertainment comes out of the local account.
Splitting our finances up according to what’s a fixed expense and what’s a flexible one made about 90% of my day-to-day money stress simply evaporate. It was like hiring a personal assistant to keep track of all the details for me. Except that it was free, and actually saved me money in bank fees and late charges.
Yet another money hack
At heart, this is just a money hack. I have about the same amount of money I had three months ago — I’m just looking at it differently. I’m using this hack to play to my strengths in managing my finances.
I’m terrible at keeping track of due dates for bills, at keeping my checking register accurate to the penny and at knowing exactly how much of the cash I have on hand I can safely spend.
Now that I have my fixed expenses being handled by my shiny new automated personal assistant, there’s a lot less detail to keep track of. I don’t need to remember, while grocery shopping, that my car insurance is due in three days. The money to pay the insurance bill is cooling its heels in an interest-bearing account my debit card can’t touch, while I’m shopping.
There’s also less money to play with. I can’t cheat my budget by using money that should be earmarked for the cat’s annual vet visit next month to pay for new jeans this month. The money in the spending account is all okay to spend, but it’s a small number of dollars. This makes it pretty easy to see how careful I need to be, and to silence the naughty voices in my head that suggest I can somehow afford a little splurge.
Overall, this approach has saved me money. Making mistakes about due dates and bank balances can get expensive fast. But more important than the money is the time and energy it’s freed up. I have hours every week that I used to spend carefully managing our cash flow and accounting for incoming bills. Now I use those hours to write, and to play with my family.
One quick caveat
A word of warning about this money hack. It’s a great way to relieve day-to-day stress if keeping track of dates and dollars is not your fort&meacute. It is not an excuse to set your finances on autopilot and walk away.
I do keep track of our finances every week. I check to make sure the bills have paid out correctly, I look for ways to save on those fixed expenses as well as the flexible ones.
Once a month, my husband and I sit down and go over every single category in the budget together, check our actual spending against our goals, and look for ways to save.
Having the bills automatically pay out of a separate account from our flexible spending makes it easier for me to not screw up. It’s like having a safety net. But I still have to do the work of walking the tightrope.
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I really like this idea. It would make it easier to see exactly how much of my money is accounted for – all the money in the fixed expenses account. I might try this this weekend.
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We normally use the enevelope system (i guess a low level of the version you described) We cash all our varible spendings like groceries, gas, and misc. Since we are trying to get out of debt, we try to limit and minimize most of our non-fixed expenses.
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I had the same bad experience with a bank, switched from it to a local bank, and started an ING account to save for my daughter’s wedding.
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Wanted suggestion of others; do you consider investing as an expense or is it not part of the budget?
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I’ve had that set up for years. I love it.
I used it as an excuse to put things on auto-pilot, almost, for several years. Unfortunately, from time to time we rationalized using credit cards for the rewards and since we sometimes carried a balance and sometimes didn’t, I didn’t count those in the “bills” and had some bad experiences.
Last summer I took control. I made three giant shifts:
1) We stopped using credit cards for everyday expenses. I came up with a debt repayment plan and started snowballing the debt. That expense became part of our bills.
2) I used to send a fixed amount to the bills account and any overage (leftover) went to the everyday expense account. I realized that, for us at that time, that wasn’t working. I flip-flopped it so that a fixed amount went to our everyday expenses account and the excess went to the bills account. That made it easier to make extra debt payments when there was extra money available. (Incidentally, we’ve made great progress on our debt.
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3) In looking for a spreadsheet to help spark my thinking on budget categories (like Sierra mentioned), I found YNAB budgeting software. YNAB and it’s methodology have made the biggest difference overall. It’s been an amazing shift in philosophy and priorities…for the better.
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Good steps. It’s truly the non-fixed expenses that can break a budget. Good to see you found a system that works for you. We have used one like that as well.
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I was skeptical when I started reading your article because it felt so hands off. I was glad you wrapped it up with the fact that you do go over you budget and your actual spending every month. I’m all for less stress but I know from experience my spending has gotten out of control when I’m too hands off. I look back to when my husband and I made twice the income we make now, spent it and didn’t save a dime. Great post and good luck!
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We also use a similar method. We were getting so many fees due to forgetting to pay our bills. Now I just log on and watch it all happen every month.
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Good plan. Glad it works for you.
I also have everything set automatically & check it constantly (twice a week).
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I do something similar using one checking account and with quicken. Each payday, I record in the quicken register all the automatic bills for the upcoming two weeks. This also includes transfers to savings, 401 contributions, credit card balance pay-offs, etc. What I am left with is my “number” until the next payday. That “number” is my flexible spending for groceries, gas, going out, clothing, whatever. Sometimes I spend all of my “number” by next payday, sometimes I don’t. If I spend it all, I don’t feel bad because I’ve already contributed to savings. If I have any left over come next payday, I funnel that money to savings and then start over again.
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My husband and I married very young (17/18), so I have learned alot as we have gone along. I had read somewhere that you should pay the bills as they come in. So, I did, but since we did not have a budget, I would pay without knowing if we had enough money for or daily expenses and were left with no money. Then, I started paying them after extracting daily expenses, and we got into trouble with late fees because we didn’t have enough to pay the bills.
I think you have great advise, but automated payments are not for everyone. I got in trouble with those. We are paid biweekly and payments do not always fall within your schedule. Now, I have made ourselves an excel spreadsheet with at least 2-3 months of expenses mapped out. As soon as we get paid, I pay all bills due on this check. Then, on our next paycheck I pay all of the others. This cycle continues, and A,B,C always come out of check 1, and X,Y,Z always come out of check 2. Sure sometimes a bill will be a couple of days late, and sometimes it will be a little early. But, because it is a biweekly payment system: 1- I never forget to pay a bill & 2-It is never late enough to incur fees.
I have used this method for about 2yrs now, and it has worked great for us. I would recommend it for all youngsters just getting your feet wet with family budgeting.
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The challenge I see with this method is that it seems you’d have to have a reserve to start off with.
You might add up all the expenses like car insurance and vet bills and decide that you need to sock away $40 from each paycheck, for example. But if one of those expenses comes up soon, you won’t have enough set aside yet (if your insurance bill comes due in a month and you only set aside $80 by then, you’ll have to dip into your other accounts).
A step in the right direction, but not necessarily a seamless transition.
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One question: Can your husband’s paycheck be direct deposited into two different accounts? I have a similar setup, and I automatically have part of each paycheck split into each account. It removes the “lag” from transferring into ING from my B&M account. If not, it’s good to note that transferring money into your Electric Orange checking account will help it clear faster than transferring it into an Orange Savings account. Even if you intend to put money into Savings, it might make more sense to put it into checking and transfer it from there.
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I have a similar system I’ve used for years and love.
My husband’s pay goes into our checking account for regular expenses. My pay is split between a “cushion” account at the local bank, and our ING account for longer term savings.
The “cushion” account usually has several thousand dollars and is available for times when the checking account balance is low due to several large bills coming due at the same time, or a semi-anticipated expense (such as car repair) comes due on short notice. My goal is to never transfer money from the cushion to the checking account.
The ING is used for a segment of our emergency fund, anticipated long term expense (funds for renovation of our kitchen, or savings for a replacement vehicle.) Once the ING balance exceeds a certain level, we start shifting those funds to a tax-free index bond fund to allow part of our emergency savings to keep pace with inflation. (My husband and I are conservative, so despite two incomes we keep more than 6 months expenses on hand.)
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@12
I use a similar system as Sierra and the issue you mentioned can definitely be a problem. Having tracked all my expenses for a couple years I was able to go back and pull out all my expenses which added up to about $1100 – this is outside of my monthly fixed expenses which include Rent, Cell Phone, and Utilities. $1100 / 12 = ~$92 a month I should be saving. In January alone I have a $100 expense.
For myself, I get paid 28 times a year but I base my budget on 26 paychecks. This leaves two paychecks free for other uses and one usually comes in December / January and the other around July. The first one gets split half between my “Planned Expenses” category and my “Gifts” category. The second one will fill out what is still need in those two categories half way through the year.
Alternatively, any bonus money or one months savings can be used to “start” an expenses type account and give you that first few months buffer. Usually then as long as you contribute every month you will always have enough – especially if you budget a couple hundred dollars more than you have already planned (let’s face it recurring expenses come out of the woodwork now and then).
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Another option is clear checkbook .com, it lets you put in recurring payments and once you “post” then it reduces your balance. I do this every payday so that I know how much is left after the bills come out. Once the money is actually taken from my account you “jive” it so that your accounts match up.
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Why are people so afraid of using Mint?
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This idea really works well for me, and I have been implementing it for almost a year now.
Using this technique, I also tackled one of my weaknesses: my poor ability of extending my biweekly paychecks over two weeks. I had noticed, when I was paid on a weekly basis, I was able to manage my money better. So I decided to PAY MYSELF every Friday. With my direct deposit on every other Friday, I deposit $100 into my ‘flexible expenses’ checking account at ING. My bill money goes to my local bank, and savings is spread among my various savings accounts at ING. I also created a savings account called “rollover” (I don’t know why I picked that name), and $100 goes to that. Then on the opposite Friday’s it auto transfers to my ‘flexible expenses’ account.
I love having it this way, and I love the challenge of only having $100 a week to buy all my gas, food, and entertainment. Then whatever is left over, I put it into a ‘splurge’ account for fun things!
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We go one better
Mr.Sushi takes care of all the fixed expenses and I take care of all the misc expenses. That way we know for sure who is responsible when a bill does not get paid 
I use my Discover to charge all my expenses and payoff before I get the bill, so I also earn cashback. I use this cashback to get gift cards for birthdays, ‘wants’ for our home such as a toaster oven, Komachi knife set, breadmaker etc.
Works great for us!
Sushi
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Been doing this for years, and love it. Most of my bills are on a budget plan so they are the same every month except for May and September when my electric and gas companies have tbeir balancing month. I keep a closer eye on what I owe them during the last three months so I will not be surprised when I have to make up for the difference between what was budgeted and what was used. Sometimes I even have a “free” month because of over payment.
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My wife and I use almost this exact system. One of the additional things I did helped smooth the financial difference between her elementary school teacher paycheck and my software engineer paycheck. As you might guess there is a pay difference between us, and we get paid on alternating weeks. So I wouldn’t have to keep track of who was getting paid what week, I divided the “fixed expense” transfer unevenly between our two paychecks to leave a consistent amount in the “flexible spending” account each week.
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Hmm this isn’t too far off a system I’m trying to implement since we switched payroll systems. Now that I spent forever tracking my monthly spending, I might want to revisit my strategy. Thanks for the input!
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@Tazdollars, the whole world isn’t American.
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I think the most important lesson from this post is that this couple has been researching finances, they admit when they’ve got a problem, and they’re willing to try a new approach until they find one that works for them. Good job!
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I’m always surprised when people talk about saving on late fees and charges. I’m not super savvy, but I have never, ever had a late fee or overdraft. Maybe because I still pay my bills by check? I also keep a buffer in my account.
The idea of having something auto debited from my account just makes me nervous. My student loans are the only things that do that, because they reduced my interest rates if I agreed to it. Everything else I pay by check, and considering you get the bill about a month before it’s due, it’s pretty easy to plan for.
I do like the idea though of budgeting for those yearly recurring expenses. It always hurts when I get my renter’s insurance bill. $300 for a year of insurance is cheap, but it’s always a not-so-nice surprise when it arrives.
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@Tazdollars, Mint doesn’t have my CU there, which is my primary account, so it doesn’t do me much good. Actually, most management software doesn’t have my CU, which isn’t a national one, so I just work on my own.
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I have the same type of set up as far as the accounts go. Two checking, and a few savings accounts. I don’t automate any bills, though. I still manually pay those each payday. There are a couple that are automatic withdrawals, but they are ‘pull’ type withdrawals (loan payments, Netflix), rather than ‘push’ out of my account, so there is very little room for error on my end of things that they could charge me fees for unless there wasn’t money to cover the payment.
I also use YNAB (youneedabudget.com) for my budgeting purposes. I’ve been using it just shy of 3 months now and the increase in financial awareness is astounding. My only wish would be that I had found and implemented it sooner ~ we’d be light years ahead of where we are now.
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@Sarah #25:
There’s a huge difference between auto-debiting and online bill pay. I pay my bills via bill pay, and I set the amount and date that I want the payment to go out from my account. No one has permission to reach into the account and take my money. It takes significantly less time for me to manage this way. I also have an account with my fiancee that’s essentially paperless, and am only permitted to write 3 checks per month without penalty. I use one for rent, which leaves 2, and I have more than 2 bills to pay.
Also, I operate on a zero based budget, of which a buffer is included, but is very small. What you’re doing obviously works well for you, but a lot of people these days don’t want the hassle, whether perceived or real, of writing out checks to pay bills when other options are available.
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Off topic comment I just had to share: kale is great in soups with cream. I have a recipe for Olive Garden’s Zuppa Toscana, it’s great!
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That is a great little hack. I’m one of those people who just never seems to be able to get the accounting up to date for my finances, so I’m going to try this.
It sounds like it would mean less frantic end-of-the-month Quicken updates, if nothing else
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This has been our system for a bit. We are still working on it since our budgeting skills could be refined, but it is working for the most part. The easiest thing for us is that we get paid alternating weeks, so every week, we just transfer the leftover from our fixed expenses to the flexible expense account. I only wish our number being transfered into the flexible account was bigger so we could accommodate more saving/investing, but that is more of the budgeting/cutting expenses problem we seem to keep working at.
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If savings are automated too, what’s so bad about everything being on autopilot. Every month all my bills get paid and my money goes into savings w/out my having to do anything. Then when savings gets big I find somewhere to invest it. Of course I tally up every expense at the end of each month and track in an Excel spreadsheet.
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@brooklyn money
One of the issues with complete autopilot is that you tend never to look at you accounts. I just spoke with a woman that had her autopilot going and was getting billed by a scam company for $23 a month. Only noticed it after more than a year! So while it may make life easier, autopilot also tends to make you forget your normal oversight role.
You use Excel to tally your expenses but many people that are on autopilot just forget about their money and focus on the rest of their lives.
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Another off shot of this idea would be to separate fixed and irregular expenses between two different credit cards.
You can just set up two different checking accounts in ING and this way you won’t have to have two different banks.
Great idea Sierra. Might have to try something similar myself.
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@Tazdollars: I’ve wondered the same thing, though Andre and Ronnie make good points.
My husband and I talked with his mom about Mint last weekend. She was worried about security and Big Brother, warning us that we were “putting everything right out there on the Internet” and letting Mint “learn everything about us so they can sell us stuff.” We didn’t succeed in convincing her that Mint is just another company we’re trusting to keep our data safe, like a bank or credit card company.
Mint makes it incredibly easy to track our regular expenses and plan ahead for one-time hits. I’m spoiled for life; I can hardly imagine processing transactions myself (though I’m sure I could if I had to). Since I check it almost daily, I’m not concerned about missing anything.
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Citizens Bank is a terrible, terrible bank.
We had overdraft fees of over $700 that the bank wouldn’t refund — we had deposited a check and it hadn’t cleared yet while we made 10 or so small purchases with the debit card. I will never do business with that bank again.
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The wants/needs conflict seems to be a sticking point for a lot of people who struggle financially.
Its just a matter of discipline. I think most things that originate as needs in our brains, with a little logical thinking, will turn into wants, and therefore become unnecessary.
Once you are financially sound, you probably don’t need to be so strict with defining wants/needs.
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I’ve been doing this for about a year now – I have my paycheck autodeposited into two different checking accounts, one for fixed expenses and one for variable expenses. I use online bill paying to schedule my payments and check my accounts twice a week online. It has vastly simplified my budgeting.
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I use pretty much this system with some minor variations. As pointed out by some people, it can take a bit of time to set up especially if you have a big bill due early on in the piece. In my case my life insurance bill was due at the time I started and I didn’t have the money to spare – so it had to go on the credit card. It has taken me a year to set the system up so that it works, in that year I’ve been very frugal because as in the case of the life insurance, I had to pay back the credit card at the same time I was putting money down for the next instalment – essentially paying double in that period of time.
My main variation from the system described is that my bill payment is not automated. As I receive bills, I set up the payment manually on the date that I receive the bill to be paid out on the day that they are due. I like the control of doing this rather than having a direct debit.
Now that I have managed to get through that I find myself ahead. I no longer have any debt, if I want to splurge on something I’m limited by the amount in my local account and the exact same amount is taken out of my account for fixed expenses each week – no more weeks of riches followed by extreme poverty as you realise you forgot a bill coming up. I’ve gone from being debt one year, breaking even the next and now I’m ahead and looking forward to finally starting to put something aside for the future. The sheer freedom of knowing that I when I receive a bill I have the money to pay for it is wonderful. I wish I had done this so many years ago.
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I’ve never quite understood why some people view food and gas as “variable” or “flexible” expenses and utilities as “fixed”. In both cases, you are only paying for what you consume and they are recurring expenses that are relatively the same each month. To imply that someone can control what they spend on food and gas but not utilities is absurd.
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I just recently started a system very similar to this and you’re are absolutely right about the stress factor. Every week the right amount transfers to savings, xmas savings, bills, and vacation. Each in their own account. (My bank lets me make sub-accounts which is awesome) After all that I know what I can play with and still meet all my goals. Zero stress and after it’s set up, zero effort.
) something that I can’t afford from my flex account, I borrow against my savings. Sounds bad at first but I have specific rules on how much can come out and how long I take to pay it back with interest. So if I get the urge to pick up a new $500 tv, in stead of reaching for the credit card I pull it from savings and immediately set up an automatic transfer to put it back plus 25 percent over the course of 2 months. In the end I get to splurge on something every 2 months and it actually forces me to save MORE.
I did take it a few steps further though. When I need (or want
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@40 Dave
At least in my case, the particular utilities I pay (my cell phone and cable/internet), are fixed costs. Where while I can budget a general idea for what I will spend on food and gas, it varies from month to month. And to a certain extent I really can control food and gas costs.
There’s my work but other than that I can cut down on unnecessary trips to save on gas if I need to do so. Food is even more variable. If I eat out instead of shop for groceries my bills will tend to be higher and likewise I can choose to simply do a pantry clean out for a few weeks which reduces my food costs to close to 0. It doesn’t get much more variable than that.
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Eh, I was just going to write a long post @40 but Chiefcaba (#42) said the same thing far more succinctly.
As for the original article, I am in the process of switching to a very similar method. I was quite interested to read Sierra’s take on what I have been formulating myself. Thanks for helping me see it more clearly!
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We also have two banks–one is a local credit union and the other is an online bank. The difference for us is that I use the credit union for everything, paying our bills through bill pay. I can set up the payments the day the bill arrives, but set the date it goes out to the bill due date. I then put the charge into my MoneyDance software for that date so I can plan what can be paid when and how much I actually have to spend even though the bill isn’t due yet.
The online bank is strictly for an emergency fund. They have bill pay and other services, but I’ve been with the credit union for so long and have been so satisfied with them, that I’d rather stick with them for the bills.
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For us, we’re on a “budget billing” system for our heat & cooking gas – so, when we cut down how much we use (which we did, 3 years in a row) it will eventually cut our payment – but not til the end of the year.
Ditto the phone – we can lower our land line bill by canceling it, but it wont’ erase the bill that’s just about to come when we do it – it reduces the *next* one. Not helpful if I’m out of money this month. And the cell phone is worse because we’re locked in for at least another 6 months.
Debt payment is another one that’s variable – you can pay it off, or negotiate a lower rate – but belongs in the “fixed” expenses for month-to-month budgeting.
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It sounds like it works for you. It wouldn’t for me – I pay fees for every transfer. I already ended up changing from weekly transfer to ING (for my savings) to monthly, in order to save on the fees.
However, I’ve been looking for something similar to this. I’m finding it harder to deal with money now that I’m not using the envelope system anymore (it worked but a) cost a lot in banking fees and b) was unpractical since most of our purchases are online, meaning we had to put the money back into the account before we could spend it anyways).
On the other hand, doing one big transfer to ING and then, from the ING acocunt, the various smaller ones (paying bills, but also putting the money into the different savings account) would actually save us a long in fees. So that might be something to look into.
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@Matthew – we can split his direct deposit, and we did that at first, but I actually preferred to keep all the inflows in one place so that I can manage more directly the fixed expense amount: if our fixed expenses go down because I find a way to trim 20% off our car insurance, I can easily change the fixed expense money to reflect that. It was a way to force me to stay more hands on with the money.
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@Rosa – we put all our debt payments and savings in the “fixed” category, actually ahead of everything else, on the “pay yourself first” principle.
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This is great! My sisters are always amazed that I have ‘several’ accounts. That is just added headache, they claim. Not so! It may appear to be more complicated to use more than one bank, but it is much easier in the end. I guess that is why I like the sub-accounts in ING Direct. And I am glad my money is divided – it looks smaller and keeps me on track. Thanks for sharing your money hack!
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I used this exact same method! I’m happy hear that it’s helping other people, too. My life has been so much less stressful once I divided up my “fixed” and “flexible” money into the two separate accounts. It did take a couple months of shuffling money around and adding things up to get the right flow, but now it makes life so much easier. I know that the money in my local checking account is for my immediate needs, and not saved up for next month’s rent!
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