A budget is a useful tool to track and control your spending. But a static budget can actually cause more problems than it solves. A static budget is used to calculate fixed expenses to help forecast what you will pay in bills. For variable expenses, this budget provides a maximum spending limit to help control your finances.
TL;DR (Too Long; Didn't Read)
A static budget helps you prioritize and better live within your means. However, they aren't accurate for tracking expenses and don't account for unpredictable events.
Example of a Static Budget
Before you opt for a static budget, you need to understand how it works in terms of fixed and variable expenses. For example, if your mortgage, car payments, insurance and cellphone bills are $800, $200, $100 and $80 a month, respectively, your static budget will be $1,180 for those bills. For variable expenses, such as food and gas, you set a fixed figure and attempt to stay within those parameters. For instance, if you allocate $400 a month for groceries and fuel combined, it is your goal not to exceed that monthly figure.
Advantages of Static Budgeting
One advantage of static budgeting is that it teaches you to prioritize. You create a clear distinction between the things you need and the things you want. By forcing yourself to remain consistent, it ensures that your bills will be paid on time.
Static budgeting can also be beneficial if you regularly spend more than you bring in. It essentially allows you to start living within your means, meaning you spend less than you earn. This is especially helpful if you struggle with debt due to past financial choices.
Disadvantages of Static Budgeting
One problem with static budgeting is that it does not account for life's unpredictable events. While fixed bills, such as mortgages or car payments, are easy to predict, variable expenses are unpredictable. As a result, exceeding your budget will cause stress.
Static budgets also are not an accurate way to track expenses. In fact, all they do is provide a basic guideline that will be difficult to follow, should your income or expenses change.
Alternatives to Static Budgeting
If you find that a static budget does not work for you, consider a different approach. If you abandon a static budget in favor of a more flexible one, not only will it put your mind at ease, but you may notice that your spending is not as excessive as you think. Rather than allocating $200 a month for groceries, monitor your expenses over several months.
For instance, assume that you spend $220, $170, $150 and $250 on food in June, July, August and September, respectively. Notice that you sometimes exceed your ideal budget of $200. However, if you add those numbers and calculate the average expenses, your monthly average is $197.50 – a few dollars below the limit.
Now that you know the average, you can base your budget on that number. Instead of guiding your budget, the budget establishes itself and guides you.
Alex Saez is a writer who draws much of his information from his professional and academic experience. Saez holds a Bachelor of Arts in English literature from Queen's University and an advanced diploma in business administration, with a focus on human resources, from St. Lawrence College in Kingston, Ontario.