“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.
I feel overwhelmed I want to save my home needs many repairs I want to eliminate debt how to do it all and stop working so much holding my breath hoping I’m gonna cover all my bills
just PLEASE be careful with charities !!
as THIS IS – a wasted money !!
/please read about it !!
– HOW MUCH money is actually going to those in needs or the case..
about 20% – rest is THEIR administration – so – wages, building, CEO etc…/
instead – help a specific person or some family.
I do that
everywhere where you turn your head – you will see someone in need.
Agree whole-heartedly with the charity bit.
I prefer to help out the people I know or in my community directly instead.
This post is really valuable, and I like the spending plan and “fixed cost” of items. Only the charity part does seem “unnecessary” to me, when you can be a help and assist in your spare time, whenever. I used to do that until I considered I gave too much of my time to the point I forgot to use it for my kids and myself. Aware of my spending habits with this spending plan is genius because I won’t regret doing it uselessly. All in the check and balance way of doing it. I feel like it was unfair to one or the other person to have to more or to contribute.
Are you familiar with Charity: Water? 100% goes to providing clean drinking water. They have a unique set up where set donors have volunteered to cover admin costs years so 100% can go to water projects. You can actually follow your funds on a real time live map and see the local maintenance of these wells years later.
joshua becker says
I love the less tedious nature of this. However…how do you “control” this? Just using cash? Most of my purchases are on the card and it’s easy to lose track. Yes, you can go at the end of the month and review, but…
Just get e.g. $500 out in cash and pay everything cash?
joshua becker says
This method doesn’t track your spending on a transaction-by-transaction basis. It’s just requires a one-time evaluation of your fixed expenses compared to your income in order to better understand your financial situation and margin. To calculate adjustments that you desire to make (or were forced upon you), you would complete the process again. There is no need to pay with cash – it’s about taking a snapshot at a moment in time.
I guess I do a version of this method along with the 50-30-20 rule. If any part of that exceeds it’s allocation, then I have to take a deep look at my finances and make some decisions. To help, I’ve opened two accounts one of which is specifically used for discretionary spending. Everything in that account is what can be spent on non-necessities. The amount is 30% of my paycheck that I have directly deposited into that account specifically. Having one account that holds all of my money for my necessities and one account that holds my discretionary income was a game changer for me. And it’s not a lot to manage, in my opinion.
The 50-30-20 bit is comfortable for me, so I would say it’s worth a look into.
I use the 2 bank account method also. Has helped a lot to have one bank account for the monthly bill paying, and I know those are always covered. The balance nice in the discretionary one can flow up or down as I want it to.
The two bank accounts is genius! I don’t know why I haven’t thought about it before, I do have two banks!
We never needed a plan. Just don’t buy stuff you absolutely do not need, and take care of what you have. Prepare healthy meals at home. Spend time outdorrs. Put God, family and people first. Be generous when you can.
This is exactly how I “budget”–and I’m no banker! But I am religious about tracking spending.
With my budget software (YNAB) I use the broad categories of “needs” and “wants.” “Needs” are the fixed expenses as well as very basic survival needs. In other words, I want to know how much do I HAVE to have to get by from month to month.
I depart from Joshua’s system in that I do budget my “wants” in order to track if what I spend my money on is in alignment with my goals and values or not. When I need to cut back, this is the category I target.
I was inspired by Elizabeth Warren’s book “All Your Worth” which says that your budget should represent certain percentages of Needs/Wants/Savings.
I’ve also been inspired by the classic book Your Money Or Your Life by Joe Dominguez and Vicki Robin.
Thank you for sharing this. It is very much an affirmation that I am on the right track!
Marilyn Luster says
I created a monthly budget/spending plan using a spreadsheet, going several years into the future, using 12 columns for each year. I put all the income at the top, then subtract all the expenses and savings. The ending balance is copied over to the top of the next month. It really helps to see what I’m spending and how much is left over at the end of the month. I have two credit cards that I pay off each month. One card I use to automatically pay all monthly utilities like phone, cable, electric, etc, and the other card I use for groceries and other expenses. The cards earn a few hundred dollars each year in points that I apply back to pay the card balances.
Ivory Wilderman says
I have an account for fixed expenses which are due monthly.
I also have an account for annual expenses such as Costco/Prime/AAA memberships, DMV for car tags etc. I calculate all of these expenses and divide them by 12 and put this amount in a separate account each month and I pay these expenses as they are due separately from fixed and discretionary spending.
I’ve been doing this (Personal Spending Plan) for YEARS –without knowing it had a name! LOL. It’s just how I’ve intuitively learned to manage my money.
And you’re right. It’s completely freeing, compared to a “budget”.
Pedro M says
I do it the way the article says with one difference: I sum up all the fixed expenses for a whole year and the divide it by 12 (I do this because, although most expenses happen every month, others don’t, like car insurance, Christmas gifts, holidays, …). This way my fixed expenses are the same month after month. At the end of a month I might have 300€ (I’m from Spain) left, but that money will be necessary in the for the holidays or whatever. I put this fixed monthly money in one account, and pay everything from it. The spare money goes into a different account.
Pedro – having two accounts and working from an annual basis is really good. I have done that too. What it requires is an initial amount (for me $1000) in the fixed budget account to pay for larger annual or semi annual expenses that may come up in the first part of the year before any excess has built up in the fixed account. By the end of the year, the $1000 should be in there again for the following year.
Rebecca Lyne says
What am I missing here? So you list out your actual expenditures against your income. Ok…and?????
Well, if you are a person who is good with money and usually don’t spend more than you earn, then this article doesn’t tell you anything new. I’ve managed to save a decent amount over the last years without having a written budget, and just did one recently out of curiosity and because my life situation and expenses have changed and I wanted to know how much I could actually save each month.
But a lot of people live paycheck to paycheck and struggle to cover all costs, and writing it down helps you realize in which areas you can save, and how much disposable income you actually have, and then e.g. withdrawing this disposable income in cash so you always know how much you have left to spend.
For years I did what I called the “red circle method” for savings. I had a consistent income and got paid every two weeks. At the end of 2 weeks, what ever was left in the checking account, before depositing my next check, I put a red circle around the balance. The new deposit would become my new balance. Sometimes my previous balance might only be $5.69, sometimes, it might be $20.35. It didn’t matter. I circled it. Sometimes it was hard to circle $75.00 but I did it anyway. It didn’t take me very long to save up $1000 and I never had to worry about bouncing a check.
Brilliant! This totally resonates with me.
I’m totally with you. I was excited to read this article, expecting some fresh insight into budgeting. This is about as basic as it gets and pretty much common sense.
Add up your “fixed” monthly expenditures, mortgage/rent, utilities, car related, insurance, etc.
Subtract those from the money that you bring home.
What’s left is discretionary- yours to spend however you want.
Connie Ketterer says
I actually started using this after reading it a year ago. I set up two accounts – one that I put the money for fixed costs in and have bills automatically paid from there. The second one is where the discretionary money goes. Then when I spend outside the fixed costs, I transfer money from the discretionary acct to the first one to be paid – but that transfer makes me realize quite vividly just what I am spending.
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.
We started doing the exact same thing a few years ago and it has worked beautifully!
Devin Quince says
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.
Karen Kennedy says
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.
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.
Carol sgaw says
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
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.
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~
Deborah Moss says
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.
Andrew Walter says
That’s exactly what I’ve been doing for several years. My primary checking account which I get my paychecks deposited into is the checking account where I pay all of my bills. My secondary checking account which I call my allowance account is for my discretionary spending for the month. At the beginning of the month I determine how much discretionary spending I have for the month and then I transfer that amount to my “allowance” account.
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’m a prime user and don’t see any ads. Depending on your browser, you may want to check your settings and make sure you’ve got all the tracking turned off. You can also get ad blocker add-ons you can “attach” to your browser; many are free, like the Chrome ad-blocker. =)
gloria mccord says
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.
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.
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
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.
A bit late to the party, but I might be able to help. I’m self-employed with a variable income, but have noticed I average a similar income each year. Based on that, I pay myself a regular salary out of my business account and into my personal account each month. You can deposit to savings and “pay” into checking each month instead if you work for someone. You will need to save a bit of a buffer at first (beans and rice, rice and beans), but once that cushion is built up in the business/savings account, this works great. I personally do a sale every January that helps me frontload my account. Hope this helps!
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).
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.
Maybe they are to her. Maybe she feels she needs to spend less or wisely. This seems to work for her.
I absolutely love this idea. Maybe there’s a reason I haven’t made it to the bank to cancel my other checking account. As of now I planned to do that next Monday or Tuesday as I have those days off. This is giving me pause though… and I thank you, as I think this would work well for me. It would ensure all of my bill get paid every month and I wouldn’t be able to spend any of my bill money because there won’t be anything to spend. Thanks again!
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.