In a previous post I explained my method for setting up a budget. Not only can a budget help you spend and save, but once it is working for you, a budget can provide financial flexibility.
In order to get maximum flexibility from your budget, first try to get yourself into a position where the income you earn this month is next month's spending. There are many benefits to this:
- you will never overdraw your checking account because there will be a cash cushion
- you will never be squeezed by a larger bill (like your mortgage or rent payment) that is higher than your weekly or bi-weekly paycheck
- you will not have to keep a checking account register- just use your spreadsheet to keep track
In addition, by being one month ahead, I put all bills that do not charge a fee for doing so, on my credit card. So, I only have to pay 3 or 4 bills each month, which has greatly simplified bill-paying. In addition, my credit cards give me money back for using them, so this allows me to maximize the return. A note of caution, ONLY do this if you pay your credit cards in full every month.
I also project my budget one or two months ahead. If, for some reason, I have an unexpected bill or a line item that is higher than projected in the current month, I can “borrow” it from myself, simply by deducting it from the next month or two months on my spreadsheet. I then know in the following months to cut back my spending to make up for it. Again, I can do this without overdrawing my checking account because next month's money is already in the bank. The trick is to not do this too often, or for too high of amounts, or it will make the following month too difficult to balance.
I am paid bi-weekly, which means during two months of the year, usally around May or June and again late in the year, I get an extra pay check. I use my budget to know when I will receive this extra money and can plan ahead for its use. I use the end of year money to pay for Christmas and some extra savings. I use the Spring money in a variety of ways: Spring clothes for the kids, in some years, for a vacation, in others for extra savings. This year, it will help pay my tax bill, because the AMT hit me hard this year. Not fun, but because I have planned for it, I will have the money when the bill is due.