You’ve put together a budget that has a pretty good shot at bringing you closer to your saving goals. Excited, you think to yourself that this is the moment where the road to financial betterment begins.
Fast forward a few weeks and you’ve got no clue what is what anymore. Unexpected bills, impulse purchases and various installments have made it really difficult to keep track of your progress. With all hope looking lost, you get the urge to just give up and hope you nail it the next time around.
Sound familiar? you are not alone.
Chances are a good chunk of your month to month spending is a result of spontaneous circumstances, interactions or emotions. Such spending is a challenge to effectively plan and predict.
Budgets are generally overly detailed and require strict spending lifestyles that leave no room for spontaneous purchases. Add to that subscription and installment payment options, and it quickly becomes evident how hard it is to adjust budgets when things don’t go as planned.
How can we account for spontaneous spend when managing our finances? Before attempting to answer that question, let’s start with taking a step back and revisiting the underlying concept of budgets.
Going back to the basics
At its core, budgeting is evaluating income (positive) and expenses (negative) over a period of time:
The remainder, or net result, is either a surplus if we manage to spend less than what we earn for that specific period, a balanced budget if income equals expenses or a deficit if we’ve overspent.
In personal finance, balanced budgets and surplus budgets are essentially the same thing. The former attempts to allocate every dollar towards a purpose while the latter ensures you always spend less than what you earn. The underlying goal is to not overspend.
Detailed budget plans tend to work well with balanced budgets but can be hard to follow if a good amount of spending is impulse-driven. A surplus budget, on the other hand, abstracts the concept of where money is being spent and focuses on ensuring a positive bottom line.
The ultimate goal of managing our finances is to channel a portion of our income towards financial betterment. This can be an emergency fund, investments or a downpayment for a house. If we treat that portion as a fixed expense, then does it really matter where the remainder of our money is being spent?
Simplifying our budgets
Revisiting our budgets and focusing on the end result, we could conclude that regardless of how and where the money is going to be spent, we should do our best to maintain a surplus for the month.
Below are some steps that can effectively do that:
- Write down your monthly income. If it varies, apply an average of the recent months. This will serve and be referred to as your surplus.
- There are likely to be recurring expenses every month. i.e your rent, bills and subscriptions. Subtract these upfront costs from your surplus regardless of their payment date.
- Take into account other potential upcoming payments such as installments and subtract them from your surplus as well. Examples include “buy now, pay later” solutions like Afterpay or that iPhone you purchased on a 24 month plan.
- If your goal is to allocate a % of your income towards savings (and it should!), calculate that amount and subtract it from your surplus.
- As you go through your day to day, keep track of your spontaneous spend and subtract it from your surplus.
- Avoid subtracting credit card payments from your surplus if you pay your statement balance in full every month.
- You should now have an up-to-date account of how much money you have left to spend without turning your surplus into a deficit.
- Reset and do the same every month
What about upfront large payments or unexpected bills?
You might need to pay for your flight tickets in advance or get a better deal if you paid for something in full rather than over installments. What strategies can we use to make it work with the above? Treat them as payments overtime.
Going with an example of paying for an airline ticket in advance that is $400. You could treat that purchase as a $100 payment for the next 4 months and set it up so that you are subtracting those $100 from your surplus at the start of every month.
A sense of clarity
Once you get into the habit of this, you will come to realize how great it feels to have an accurate up-to-date picture of your leftover spend for the month regardless of how it unfolds. It has helped me make better decisions when assessing purchases, reward myself when I exceed my goals and mitigate situations where I find myself overspending.
Is the “Surplus” approach right for me?
There are a number of techniques such as the envelope, zero-based and priority-first budget systems. Depending on your situation certain techniques may be more beneficial than others and I encourage learning about them.
If detailed budgets or assigning every dollar to a category doesn’t fit well with your spending habits, why not give the “Surplus” method a shot?
Is there some app I can use that does this for me?
Yes! I created an app that does all that and more. It’s called Surplus and it is available as an iOS and iPad app on the App Store. Check it out by tapping on the image below: