tl;dr
This is a lightweight system for budgeting where you track four categories of expenses: Fixed, individual Allowances, Flex, and Other. At the end of each month, you retroactively reconcile your budget and put spillover/spillunder into Other, which carries over to the next month, and you adjust your spending habits accordingly.
Why I do it this way
In an ideal world, we’d have a list of all expenses we would make during a month arranged into some kind of Maslowian hierarchy, and we’d just draw a line near our targeted spending amount and pay for everything under it. But since we don’t actually know the amounts for all of the expenses beforehand, we need to rely on estimates. This helps us to develop as accurate a prediction as possible about where the line needs to be drawn.
I find most budgeting systems (eg envelope budgeting) to be oppressive and high-overhead. FAFO gives you flexibility and lightweight tracking at the cost of increased responsibility. If envelope budgeting is like flying coach in a straitjacket (and it is), FAFO is like sitting in the cockpit with a compass and a map. You get more freedom, including the freedom to nosedive into the ground.
Would it work for you?
All of these should be true:
- You can exercise financial responsibility and honesty
- You have financial wiggle room (eg having a few months of expenses in liquid assets)
- You have the discipline to pursue a balanced budget over time
Tools
You can use whatever you want, but the terminology here is tailored to what I’ve found to be the best combination of cheap (~$1/mo) and convenient (~15min/mo).
Actual Budget is an open source budgeting application. I run it on my personal computer, but if you’re not tech savvy you can pay for the cloud-hosted version for ~$1.50/mo.
I recommend using the SimpleFIN bridge to automatically import transactions (this is the only paid part, at $15/yr).
Optional techie stuff for added convenience:
- Docker for portability across machines
- rclone for backups of the configuration and transaction history
- Tailscale for access outside local WiFi
- A reverse proxy (like Traefik) and Let’s Encrypt so you can use a friendly URL like
https://mybudget.mydomain.com
Setup
Step 1: Configure tools
- Put Actual Budget in Tracking budget mode
- Set a monthly reminder to do budgeting
Step 2: Establish targets
- Decide on your total annual or monthly target spending
- If you have multiple members of your household, give everyone an Allowance budget for personal expenses. Set these funds to rollover every month
Step 3: Determine categories
Categorize your anticipated expenses within one of the budget groups:
- Fixed: Expenses which you expect to incur and have known amounts
- Allowances: Personal expenses
- Flex: Expenses which you expect but have variable amounts
- Other: Catch-all category for all other expenses. This fills in all the leftover space and may sometimes overflow. The funds of these should be set to rollover
Categorization tips
It’s good to be exhaustive with Fixed expenses because they improve month-to-month stability. The Flex expenses are mostly useful for tracking expenses over time, since anything that doesn’t go in there will go into Other. Tracking Flex expenses helps to calibrate budgeting, since you can set the amounts at the start of the month to be a rolling average (or last month’s value) to help estimate how much will be left over, but it’s a tradeoff of tracking overhead vs predictive accuracy. When in doubt, just pick the things that are easiest to automate rules for (e.g. gas stations, grocery stores, etc).
Put infrequent but known expenses (eg car registration) as Fixed expenses. My preference is to divide it evenly across the months and carryover the balances after each month, but you could also schedule the full value.
Monthly routine
At the start of every month go through these steps for the previous month:
- Reconciliation: Ensure that all expenses are listed and correctly categorized, and that any non-synced account balances/transactions are correct. This is also a good time to create rules
- Retroactive adjustments
- Verify that all the amounts for the Fixed expenses are accurate. Adjust the budgeted amounts, split the transactions, or rollover funds as needed
- Set the Flex expense budgets to their actual values
- Set the budget for Other to be whatever makes the total match your target. Specifically:
Other = Target - sum(Fixed budget) - sum(Flex budget) - sum(Allowance budgets)
In the example above you can see that Aladdin and the household went over budget. Oops! They’re carrying over a debt now and should dial it back next month.
Additional tips
There are a few knobs you can play with to help align incentives:
- Applying a recurring expense to come from someone’s allowance can encourage them to optimize it (e.g. a phone bill)
- Non-recurring income can be used to offset an allowance. For example, if you find a cash-back promotion on your internet bill
- Depending on your financial constraints, you could choose to omit some things from budgeting to avoid the feeling of penalizing or disincentivizing purchases, e.g. healthcare costs
Allowances also lend themselves well to fancy financial decision making like joint purchase auctions.