“We must consult our means rather than our wishes.” —George Washington
While I don’t mention it often, I have an Undergraduate Degree in Banking and Finance from the University of Nebraska Omaha. I also have a Master’s Degree in Theological Studies, but this is a post about money so I’ll return to my undergraduate experience.
I pursued Banking because my dad works in the industry and because finance had always been an interest of mine. I did well in school graduating with honors. Yet, despite all my training, personal budgeting was a life habit that always eluded me.
I knew the importance of having a personal budget and holding to it, but the discipline was never a priority in my life. Of course, I was not alone. Gallup reports less than 1 in 3 Americans keep a personal, household budget.
But everything changed when I was first introduced to the idea of creating a “spending plan” rather than a “budget.” In fact, I have used this spending plan system with great success over the past several years after being introduced to it. And if it works for me, maybe it’ll work for you also.
The idea that distinguishes this specific spending plan from a typical budget is the understanding that while a budget dictates to you what you can spend, where, and when (“We can only spend $300 on groceries this month,”); a spending plan allows you the control of your money every single month. Also, it realizes that your purchases change and expenses vary from month to month and that a one-size-fits-all monthly budget doesn’t truly fit anything.
***
Using the spending plan model is quite simple, although it does require some effort on the front end and throughout the month (just like any personal financial system).
To get started, determine your monthly take-home pay (not your gross income before taxes, but your net income—the actual amount on your check or direct deposit).
Second, sit down and determine your fixed monthly costs. These are the expenses you currently have in your life that require some of your income every month—no questions asked. The actual monthly expense may vary (within reason) from month to month, but you know it is going to be there. It is fixed. For my family, we include the following list:
- Charity
- Mortgage
- Groceries
- Auto Fuel/Maintenance
- Savings/Retirement
- Utilities: Gas, Electricity, Water, Garbage
- Auto insurance
- Health Insurance
- College loan repayment
- Home Internet
- Cell phone
- Home Owner fees
- Kids’ School/Activities
After you have determined your monthly income and your monthly fixed costs, you can easily recognize your monthly discretionary income (the money that you have left over to spend as you desire). Simply subtract your monthly fixed costs (Step 2) from your monthly net income (Step 1). For example, if you have $500 per month left over after paying your fixed costs, you have $500 in discretionary income. The spending plan now allows you the opportunity to spend that $500 as you desire: golf clubs, cinnamon rolls, travel, entertainment, extra savings, or an 8.0 MP Underwater Video Camera. The choice is yours.
I have seen wonderful benefits to this personal spending plan:
1. The plan helps sort needs from wants as our fixed costs are initially calculated. We begin to quickly realize which expenses are truly fixed and which are not.
2. The initial realization of your discretionary income gives a healthy framework to determine how much money you actually have to spend each month. Years ago, the first time we tried this exercise, we were surprised to discover how little discretionary income we actually had each month. And we immediately recognized why we were never able to get ahead.
3. The plan allows you to see how life patterns affect others. For example, if you lay out your plan and realize that you need more discretionary income, you have a list of fixed costs that could possibly be cut or reduced. Maybe you don’t really need cable tv if it means you could spend more on a vacation.
4. You will be able to easily recognize how economics should be influencing your spending. If auto fuel goes up $1.00/gallon, you can quickly recalculate your fixed costs and determine how much discretionary income has taken a hit. Conversely, if fuel goes down, you’ll have a little extra that you can spend or save that month.
5. The plan does not require meticulous tracking. Most of our fixed costs are fixed. They do not vary much from month-to-month. Rather than having to track individual expenses each day of the month, we are mostly concerned with only tracking the amount of our discretionary income spent and remaining for the month.
Even if you don’t hold yourself to consistent tracking of expenses throughout each month, I do recommend going through the initial layout just to get a sense of your “actual discretionary income.” It can probably be completed in less than an hour. It will result in new discoveries about the state of your personal finances. And it may also be the right first step in finally finding a spending plan for your household that actually works.
I am not afraid of the word budget. It’s just a tool that has always helped me keep track of my money.
I’ve been doing exactly what this article describes for two decades. I’ve been calling the discretionary income “Peter” because it’s who I rob in order to pay all the “Pauls.”
Basically a budget or spending plan, whatever you chose to call it, isn’t your task master. It’s a guide. It’s also an eyeopener. I suspect most people aren’t afraid of the name “budget” more than they are to actually face the reality check.
Love that!! “Peter”!!
I seem to do good for about three to four months, then I go on little spending spree. Seems to coincide with season changes, but have noticed sprees are smaller and shorter than before and I don’t use the credit card for them. So small victories.
Joshua, my favorite posts are about money and budgets, even more than decluttering and downsizing to the right size life. Thanks so much for this post today.
This is a Zero Based Budget. I never understood regular budgets because they were just plans. I needed to know what was happening with every paycheck and completely allocate it ahead of time. I do it this way and use a column for every pay period. Then I list all my expenses and when each bill will be paid, and which paycheck it will come out of. At the end of each column is how much money will be left over for savings or discretionary spending.
I would love to see some sorta pic to go with this idea…creative and may help others. , i.e. ME
This is exactly how we manage our finances also. We know where every paycheck needs to go for several months. This really keeps us on track for fixed expenses as well as discretionary funds.
This is what I have done for years! We have a spreadsheet with LibreOffice, which is basically the same as Microsoft Excel, but free and open source, and at the end of November, every year, I lay this all out for the whole next year. We see what we have way in advance, saving is easier and it is astoundingly easy to readjust.
I’m pretty much beyond help in this area which is sad to say. My income is much less than my expenses and I only have basics (no cable, barely get gas and groceries). I really don’t know how people have money left over after expenses. I have three sources of income and can’t pay the basic expenses (rent, utilities, insurance, transportation). Savings is non-existent. I’ll just continue to do my best and hope for some relief at some point. However, I’m very grateful that I have food, shelter, clothing, and reasonable health and strength. Which I’m aware some don’t have and these things are priceless necessities.
I am disabled, permanently. I am 54, my husband is 65. He still works full-time, but needs to retire some time within he next 2 years, because of his health. I am a former City Clerk, and as such, feel I should better handle our $. We live pay check to paycheck, and we can hardly figure out what to cut down on any further. There are a few things I’ve thought of, such as cutting out cellphones, and going back to just a basic bones Landline. I can’t imagine not having Internet, since we’ve in a very rural area, and both spend a LOT of time reading online, about our one Hobby, Historical re-enactment, as well as for so many other things. Tomorrow, now that all the g kids are back to school after Spring Break, I’m going to tackle our spending plan once again. This article, and the comments have some great ideas…Thanks!!
Joy, a spending plan lets you see what is happening with your money and when and how to ‘move’ things around so that everything is paid and surprise, surprise there really is some money left for you to play with. It is so liberating. I used a twelve column ledger for years, now I use Simply Budgets software. I am on a very low wage and my husband is medically retired on a small allowance. End of last financial year my accountant told me that he is surprised the we can survive on so little. A budget can be restrictive, but projecting spending plan is very liberating as you can see where you are going.
From purely a positioning standpoint, ‘spending plan’ is much better than ‘budget,’ a term that instinctively repulses many! So that’s half the battle. The key I think to making your spending plan approach work is assuring that Saving/Retirement line item is big enough to realistically lead to achievement of long-term goals.
I use YNAB – it’s a check register/budget all in one. I love it. We have similar categories that I move money into (without it leaving our checking account) and track my expenses using the account register feature – which automatically deducts that amount from what’s allotted in the budget. It’s quite simple and effective. I love it.
You Need a Budget (YNAB) is an excellent tool that allows, actually encourages, the flexibility you describe. Additionally, they teach people a four point approach that is meant to break the paycheck to paycheck cycle. The system is quite minimalist too! YNAB really encourages simplyfing your finances by using your budget, rather than multiple accounts, to keep track of your money. YNAB, makes budgeting fun too.
Too bad they went to a subscription business model. Very disappointing.
I was disappointed too, until I realized how AWESOME the program has become. YNAB 4 doesn’t compare to their online program and it keeps getting better because they have the resources to make it better. Worth every penny.
I went a step further and created a separate checking account for all my fixed expenses. I put them all on auto pay. I have my payroll direct deposit split in to two accounts. I have enough go into the fixed account to cover all the withdrawals and the other goes into my discretionary account to spend on groceries or whatever.
This is a great idea.. and means you will always have the money there when the bills come in… At the end of the year if you have slightly over- estimated and have a little left over, that would help with Christmas expenses.
Melissa, groceries are not a discretionary expense.
Another tool to I would recommend would be Mvelopes.com. It takes the old “envelope” system and puts it online and connected to your bank/credit card accounts. That and it is free for a basic account which is all I need. I like it because it minimizes how much work I have to do to keep my “budget”, and helps me break out my discretionary spending money into a separate envelope. In doing so it gives me a real-time picture of how much I have spent for any given envelope. I can also easily shift money from envelope to envelope as expenses shift. The main downside is if you prefer cash transactions, this system doesn’t work the best as it is difficult to track those (but if that is your preference the old-school envelopes system would work too).
Any tips or advice on how to do this this system with a seasonally variable income?
I do a similar plan, but I do mine weekly because that is how often I get paid and because my checks vary from week to week, I can have a little more control. And if I were being honest, I’m obsessing over getting rid of some debt I have accumulated so my patience doesn’t last on a money basis. I use a variation of a paycheck in its smallest form as my controller. For example; if I get paid $1200 one week, but $1100 the next week, I always assume I will only get paid $1100 for all four weeks and anything over that I put into what he is calling “discretionary income”. So, it’s a bonus in spending or extra to put toward my student loan or car loan. I support this type of plan 100%. I’ve been doing this for about two years and have cleared out thousands in debt, but I don’t feel like I’m sacrificing. It’s quite rewarding.
My husband and I have used this for years and it has really relieved a lot of stress. We have a joint checking account that we contribute a percentage of our income to that covers all our fixed costs. Then we both have our own descretionary accounts so we can spend it on whatever we want without needing the other to sign off.
I went thru my checkbook and found the average for the various bills. I round up, just on case. Many utility companies will do this for u as well.
I always divided my expenses under various heads but the best lead i got today isto budget according to my income ( we are into business n so it varies ) but its a greatinsight to fix my income n expenses that way we can plan for long term
I do this- and REMEMBER you need to make sure savings are a standard monthly expense or it has to come out of discretionary before you spend it on eating out! Your goal should be to pay THIS month’s bills with money you already have saved, so you are never one paycheck from welfare.
Two more things: FIrst, an extra step to take is to autopay your bills a FIXED amount every month (so electricity, it’s always somewhere under $48 a month so pay $55 a month every month until your bill says you have a $50 credit, then skip a month.) This way your fixed “necessary” expenses are known EVERY month. Phone bill? Pay an extra $10 a month, check your bill, mkae sure that will cover it, then never worry about knowing where most of your money goes.
Second, On the topic of eating out- I saw this on Facebook. “You say you can’t afford to travel but you spend $10 a day eating out, plus drinks on the weekend for $50 so $120+ bucks a week or $500 a month (or so). Add that up and in four months you could have saved $2,000- you CAN afford to travel, you are just too lazy to cook.” Think about it. See you in Rome.
There is one very important thing missing. Term life insurance. It’s cheap, and ensures that your family is not wiped out if something happens to you. If we had not had it, our life would have been horrible losing my husband to an unexpected terminal cancer.
Whilst I appreciate that despite living a minimalist lifestyle, you still need to make a living for your family; it does seem a tad ‘awkward’ and definitely ironic to have Amazon link for readers to follow to purchase un-neccessary gadgets within this posting. Integrity and authenticity are important to me and I feel a tad let down with this as a reader.
If you’re an Amazon Prime user, The Ads are automatic unfortunately.
Eh, you’ve got to do what you’ve got to do to support the site. Don’t want the gadget? Don’t click on the link. I can’t imagine there are too many ad sources for the minimalist lifestyle. “Click here for something you probably won’t buy!” :) Someone has to pay for the site – I’m okay that it’s not me, the reader, and that I can just scroll on by.
I don’t see any ads at all. Maybe as Peggy said it is due to something on your end?
I set up a second checking account for my fixed espenses and have everything paid atomatically. I also have the total amount I need every month for those expenses deposited into my account so I never have to worry about the essentials getting paid. My other checking account is my spending fund. I can only spend what’s in that account so I never have any issues.
I saw this post in my newsfeed and opened the page, but never got around to reading it. Then last night I got up in the middle of the night and wrote down all of our expenses and income and thought about the money in-between, not realizing that I was making what you call a “spending plan” and that the first thing I would read when I woke up this morning is your blog post. haha!
Thanks for your continued inspiration~
Here’s another good way. After calculating the monthly discretionary income, e.g. $500, it’s easy to also calculate the daily discretionary income, e.g. $16,50. It’s much easier to manage the finances on a daily basis, rather than a monthly basis. At home we have a jar, where we put the extra money that we didn’t spend that day. If one day we spend more than the DD, we take money out of the jar again. It’s very easy to keep track of the finances that way. It really helps us a lot.
Same plan we used for many years with the exception we only used 1 income for the calculations. The higher income was used for all expenses and saving for a 4/5 week vacation with 2 children every 2 years. The other income was used for school and retirement. We did this for 30 years and we able to retire at 55. We sold our larger home for a smaller place with more property, paid cash for a motor home and traveled for 1 year so far. Love living the simple life.
BTW our children never caught on to this system, Hahaha
I’m an English professor and probably one of the least mathematically inclined people you could come across. My 21-year-old son was just telling me that I really should create a budget. Just hearing the word made me feel overwhelmed. I mean, we simply purchase what we need, right? How does writing it down alter what we need and what we purchase based on need? Then I saw this article. I sent it to my son, and we’re going to sit down and give it a go. Thank you.
I have been using this technique and didn’t realize it had a name! After figuring out the “fixed” amounts (which can vary some), I then add other catagories based on our usual spending. I can then see how much is left over, I also write down the actual expenses so I can compare each month to the previous one. I consider using my debit card as cash as it is taken out of my bank account. I just have to look at the online statement and transfer the amount onto the spending plan that is already set up online as well.. I then keep a copy of each month’s plan in case I want to access the info in the future. This plan has worked well for us. Now that we are minimizing, there are less transactions to keep up with and there is more money available to save and/or to donate.
Late, but I am not sure how utilities, groceries, and other variable costs could be considered fixed. Thoughts?
I guess they are semi-fixed really. Fixed in the sense you know you will have to pay something. You can use historical data to approximate what you will pay each month.
As opposed to a pair of jeans you may or may not need.
I came up with something several years ago that I swear saved my marriage….my husband was a spender, and I’m not. He would go buy what he wanted, but I saw we had no money, so I wouldn’t buy anything. My work clothes were threadbare. We finally reached a tipping point, and I came up with a genius idea that works for us – since our paycheques get deposited into the same account, I created two offshoot accounts that get equal money deposited into them when we get paid. These are our personal spending accounts to spend on whatever we want. If he wants to spend it on fishing or going out to lunch every day, it’s his to spend and I have nothing to say about it. If I want to spend mine on shoes and a personal trainer, it’s mine to do so. It’s like giving your kid an allowance. If I want to buy something big for me, I save mine up, and he does the same. This money is separate from major purchases for the household, but it allows us to have money that the other cant complain about the other spending. It works like a charm and we’ve been doing it for years.