“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:
- Auto Fuel/Maintenance
- 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.
Paul Carlson says
Thank you for explaining this very simply.
Our family uses an envelope budget which works reasonably well. Your post has reminded me to re-evaluate our discretionary income vs. our fixed costs, as some of our envelopes seem to have holes in them. :)
If your work offers direct deposit, you can often have your check deposited into multiple accounts. I have the money for truly fixed costs (car payment, utilities, savings) transfered into one account and then are paid via automatic bill pay. I don’t really even see this money so I can’t “miss” it. A second account is for negotiable fixed costs (gas and groceries) which are generally the same but sometimes we eat or drive a bit differently. The third account is for genuinely optional costs and this gets any excess from my check. This system makes it impossible to overspend on my wants because once I hit a zero balance then the money just isn’t there.
This is how I do it. The bulk of my check goes into my main checking account, which is the one I have all of my automatic payments coming out of. The amount transferred into my second checking account is my discretionary income. I keep the debit card for that account with me and leave the other one at home. I also get paid every two weeks, so I don’t have to make one “chunk” last all month. The “extra” two paychecks (there are 26 in a year) are like little bonuses that I can spend or save, depending on my needs at the time. Works very well.
Kathi Bridge says
Hi Joshua, love your site and I share a lot. Great start to a savings plan, and it is what I teach, but there is one more component. The thing that trips up most people ( me included) is annual or quarterly payments that show up. Then the credit card gets whipped out to make the payment. Add another section below your spending plan -the savings plan – this is where you allocate money into several eSavings accounts monthly. Then you have the money when the bill is due! This works fantastic for saving for goals too – vacations, special trip. It actually gets exciting to see them grow.
Allocate all your income to the whole plan, its known as a zero sum plan. I call it a spending and savings plan.
Keep up the great work, Kathi
“…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.”
Glad to see in here that “fixed” expenses often CAN be reduced, or even cut out completely. Utilities? Adjust the thermostat. Internet? Minimize use, and go to the library for it. Mortgage? Move to a less expensive place. Groceries? Eat differently, and waste less. Cell phones for the kids? Don’t get them, or go with an emergencies-only plan.
“But I need…!” Some of what comes next is legit — but rarely all. This is where it can get tough. It’s also where we can, with the right attitude, own our attitudes and celebrate our options. “But we need bedrooms for all the kids” becomes “giving the kids their own rooms is important enough to them/us that we are willing to cut back in other areas to make it happen.”
A discipline I’ve found to be transformative is persistently considering: what if this “need” were simply not an option? After all, people have lived for most of human history — including many at this time in history — without air conditioning, electricity, entire extra sets of clothing, mattresses, houses. At this point in life, I do have all of those things, and I’m certainly not saying they are bad. Just that if I didn’t have them, I would still have options, and this shapes how I approach my own spending plan.
On the other hand, the statement about “need”ing more “discretionary” income seemed… odd ;)
That’s a good way to look at spending money. We also use the cash method. A certain amount of money is taken out for fun every week and once that is done, no more random spending for that week. Having a fun budget really helps at home and on our road trip down to South America. Thanks for the post.
I do the same as well with the envelope system, using cash for groceries, entertainment, eating out, etc… By creating a spending plan and paying with cash for the other expenses it helps me to spend more freely with less worry
Jeannie Shaver says
I also follow a similar method of tracking expenditures. The trouble is not spending all of the discretionary money. Thats where the budget comes in:)
Dax Alexander says
Great post. I use a spending plan as well, using it to determine how I spend every paycheck. One thing I do differently is that I treat saving as a fixed expense. It doesn’t fall under discretionary income for me. It’s that important.
Darryl Parker says
We operate on a similar plan, using separate checking accounts to achieve it. One account is our “Assets” account and that pays all the fixed bills. One is the “Expenses” account and that is where we transfer our weekly semi-disposable income. I say that because we put gas and groceries in the latter. We also include Life Insurance in the former. It took a long time to figure out a method that worked for us and this works well and has helped us be more aware of our discretionary spending.
I like that; I think I need to do that. The article was good. I get bogged down by all the day to day tracking, but it isn’t really necessary to save for future wants.
Great idea! I also realized that I don’t need to fret too much about budget because about 35% of my income already goes to assets- savings, insurance, loans for assets. Willing and wishing to get to 50% as assets. Soon!
Simone Sophia says
I use this exact same method. I then divide my discretionary income by 4 since I have created 4 different savings accounts (fun money, travel fund, biz building fund, charity/give fund).
Karen @ Journey towards simplicity says
I really appreciate the reframe – having a “budget” which sounds by its nature mandatory and restrictive- to a “spending plan” which gets at what is necessary and meaningful. Thanks for your many blog postings- they are insightful and inspirational :)
I’ve never been good in math so dealing with money issues always a problem for me. I used to do this before I retired and now I’m trying to get used to a new “budget” an how to have more discretionary income/funds left over while trying to save at the same time. I put half of my pension in my savings account for emergencies, insurance every six months, and vacation. My fixed costs take up most of the money left over. I would love to be able to save portions of that for emergencies, insurance, and vacation so I wouldn’t have to touch the savings. Any ideas how to do that without going broke with that half of my money? Love all of your posts by the way. I’m learning what’s really important in life by trying to minimalize. Thank you so much for sharing your knowledge…