Reasons for Padding the Budget

Sometimes you underestimate expenses because your written budget doesn't match the reality. If gas or food prices rise, for example, and you don't update the budget, it can't reflect what you actually spend. Sometimes the problem is lack of coordination with your partner. If you take lunch every day, you may assume he does too, but that may not be the case. Padding the budget ensures that if you are spending too much in some categories, at least you're not in the red.

Even if you manage your regular expenses well, unplanned expenditures will eventually happen: Your car radiator falls apart, your daughter needs antibiotics or the IRS wants an extra $500 in income taxes. There are also fun expenditures such as birthday gifts or visits to family that happen so irregularly you don't keep track of them. By padding your budget with a reserve fund for unexpected spending, you can pay for a surprise without putting it on plastic.

When your monthly spending uses up all your monthly income, there's no wiggle room if your income drops. That can be a problem even if you spend responsibly: A smaller-than-usual bonus, a salary cut, low commissions or your business losing its biggest client can leave you wondering how you're going to make the mortgage payment. Building up a budget cushion enables you to make your bills and have some fun even if your income unexpectedly shrinks.

Budget guru Liz Weston recommends a 50/30/20 strategy for padding the budget. Limit your essentials -- mortgage payment, food, medication -- to 50 percent of your after-tax income. Optional spending takes up another 30 percent. Use the remaining 20 percent for savings or paying down debt. If your essentials are too high, look at whether you can whittle them down: Consider cheaper food, for example, or waiting longer before you take out a new car loan.