Flow-Based Budgeting
Have you ever tried to make a budget, but never really bought into it? Maybe it went out the window when life happened. Perhaps you felt like the bad cop when trying to make sense of your credit card bill with your spouse. Or, were you the one being interrogated?!
Budgeting is challenging. It can generate conflicts and induce guilt or shame. It can feel artificially constraining and time-consuming. Yet, no matter what income bracket you fall into, it’s really difficult to plan for the future without some reliable spending data. (See Budgeting is Optional (Tracking is Necessary) — Oakleigh Wealth Services.)
So what’s the answer?
I’ve tried every budgeting scheme from spreadsheets to apps over the years, and I’ve dropped them all. Then I was introduced to Flow-Based Budgeting (also known as Fixed/Fex/Non-monthly) by Natalie Taylor, CFP® at a conference put on by XY Planning Network.
The main idea is to categorize all spending into three basic groups based on how they flow (i.e. the timing and the level of influence you have over them).
Because there are only three categories, flow-based budgeting quickly gets to the heart of the matter and provides much more freedom than other budgeting frameworks I’ve tried, while still providing some guardrails. This system removes judgment and it is easily adaptable when circumstances change.
Start by breaking down your spending into these three main groups:
Fixed Expenses:
Fixed expenses are anything that’s paid monthly, is about the same each month, and could be put on auto pay. These are passive expenses because they’re based on decisions that were made in the past, not in the moment.
Examples:
Mortgage/rent
Minimum debt payments
Daycare
Monthly insurance premiums
Utilities
Subscriptions or memberships
Often, 50% or more of our budget is fixed. Separate out these expenses and put them in their own dedicated account. Then, put everything on auto-pay.
Flex Expenses:
These are everyday expenses. They tend to vary from day to day and week to week, and could never be put on auto-pay. This category of spending is typically the most important place to focus since these are active spending decisions.
Examples
Food (groceries, dining out)
Shopping
Entertainment
Gas
Medical copays
Household supplies
Small gifts
Break your total monthly flex spending amount down to a weekly number. It doesn’t matter what you spend on the underlying categories (e.g. gas vs. entertainment vs. restaurants), just track your overall weekly flex spend (Pro tip: choose a specific day of the week to do this. Saturday works best for most people since it gives you a clean slate for the weekend).
To make it easy to track, put all of your flex spending on its own dedicated credit card or separate checking account. This way, the account balance becomes a signal as to whether you’re on track.
The goal is not to hit the same spending number every week but to get regular feedback on how you’re doing. If you went over one week, maybe pull back a little the following week. This framework provides freedom within boundaries. You can choose to treat yourself without guilt.
Non-monthly Expenses:
Includes everything that’s paid less frequently than monthly. These expenses are variable and fluctuate in amount and timing. They tend to be more active than passive (do we vacation at a national park or in Europe?). There are some curveballs too (oh, no! The van needs a new water pump!). However, these are the type of expenses we can and should plan for.
Examples:
Travel
Holiday gifts/celebrations
Fun money
Real estate taxes (if not escrowed)
Non-monthly insurance premiums
Home & auto maintenance
Non-monthly tuition payments or summer camp
Non-monthly expenses should be funded in advance. Open a separate high-yield savings account or money market and fund it with 6 months’ worth of these expenses. Pay for your non-monthly expenses out of this account. Make monthly transfers into the account to fund it, or refill it with expected windfalls like bonuses. Now, all you need to do is check your account balance for rapid feedback on how you’re doing.
*Adapted from Natalie Taylor’s presentation at XYPN Live 2023
Getting Started:
Start with a spreadsheet like this one. Calculate your monthly fixed expenses, your average flex spending on a monthly/weekly basis, and estimate your non-monthly expenses for the year.
Next, put each of these categories on their own credit card or account or pair it with budgeting software like Monarch Money. So many budgeting apps break your spending down into dozens of categories, which just leads to losing the forest for the trees. I like Monarch, because it allows you to create custom groups of expense categories to easily implement the fixed/flex/non-monthly framework and track it over time.
Review your spending on a weekly or monthly basis by checking those account balances (or using software). Notice how you’re doing, but also notice how your spending is (or isn’t) aligned with the things that give you satisfaction or meaning. Afterall, the deeper goal here is to better align our use of money with what gives us real and lasting value.
