“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 like to have a budget on my money as well as on my calories! It might take a little time and energy to keep track, but at least it tells you exactly where you’re going, and it makes it much, much easier to reach your goals, financial or health wise! :-)
Great post! I’ve been recently trying to keep up with my finances and there are some really helpful templates out there that can help with keeping track of spending.
For me I find it difficult to accurately project how much I spend on some things, but I think I will get more approximate figures the longer I budget and keep track of my spending!
This is exactly what I did when I moved out of my parent’s house for college. First I estimated the numbers (because I was not experienced with this I aimed high) and then kept track of receicpts for a month or two and I was set. You are completely right with point 5, that most of the time you have fixed costs.
Ulike my friends in college, I never had any trouble with overspending during the month and not being able to buy food at the end of the month or having to ask my parents for help. I graduated debt-free and was also able to save some money this way.
This method also surprisingly doesn’t take up much time. Of course it is a little bit bothersome for one or two months (counting all the receipts), but maybe I spent 8 hourse a month for three months on this, which I think is not too much.
M @ An Elegant Solution says
The distinction you describe between a budget and a spending plan is a simple, yet important, mindset shift. The ebb and flow of both income and expenses is a fact of life. Budgets often fail to accomodate those fluctuations, which I believe is why so many people get frustrated and abandon them.
I’m not sure what I would call me and my husband’s budgeting system, although I believe I have heard others refer to it as a “zero budget”. Basically, the idea is to spend as little as possible on discretionary items. It requires a bit of discipline, but we are both highly motivated by our current savings goals, so it works for us.
We prefer the term “spending plan” also, and have used that to help others get started on Dave Ramsey’s plan. Our family’s problem isn’t a spending problem; it’s an income problem. What do you do when there’s not enough to cover the fixed expenses, much less leave any for discretionary spending? We’re working on raising our income by offering services for writers and entrepreneurs on our website, helping them to make more money as well.
My experience in talking with people about this very subject is that peoples definition of “fixed expenses” vary GREATLY.
Our problem is that my husband’s income varies as do our expenses. Have never been able to figure out how much money we need every two weeks for gas. We also have 2 teenagers and a 12 year old. It is very difficult with them.
We’ve had success using the YNAB (You Need A Budget software) method of saving up one-month’s (average) income, then budgeting out that money for the next month. So right now we’re spending the paychecks we received in July, and setting aside our August paychecks to cover our expenses in September. This way we know exactly how much we have available to spend for the month and have a month’s warning to prepare if we’re hitting a low spot. For categories like gas that vary a lot, we try to keep enough on hand to cover the highest peak we’re likely to reach. So we usually gas up the car twice a month (@ $50 each) but a couple times a year (usually unpredictable due to unexpected trips) we have three fill-ups in a month. So our very first month we budgeted $150 for gas, but we only had two fill-ups so we had $50 left over as a buffer. Then for awhile we could just budget $100 a month to cover our needs and keep the $50 balance rolling over. When we do have a 3-fill-up month, it drains our gas account down to zero – but doesn’t put us into the red. Then we have two months of budgeting $125 each to re-accumulate our buffer, then we can drop back to budgeting $100 a month again until the next 3-fill-up hit. This method helps smooths out the peaks & valleys of our budgeting without us having to perfectly predict how much we’ll spend. Does that make sense?
melissa johnson says
Where does paying down debt factor into the spending plan??? I don’t see any mention of it here.
When I started to budget my money and pay down my debt, I included the debt as a fixed expense from each paycheck. It forced me to make paying down the debt a priority. I was careful to also include putting money into savings as a fixed expense. It relieved the anxious feeling that I would have nothing leftover for emergencies if I put everything towards the debt. As I paid off more and more of the debt, I moved the extra money I used to put towards debt into savings. It took me a year and a half, with a few bumps along the road, to get out of debt. I feel so much better now knowing that I don’t owe, and that I have some decent savings. I still use this plan since I use a credit card regularly. It keeps me from overspending since I know whatever I charge will be a fixed expense and will have to be paid off each month in full. It’s changed my spending habits for the better.
Good luck with the debt-issue, I’m rooting for you!
We are mainly living on social security these days, and in working on our finances one day, I realized that the social security would cover all of our expenses with a little left over. I also have a few other resources for money – doing some virtual assistant work and a WAHM business – so I set up an account for that extra money to go into. Like someone else mentioned, I leave the main account alone, knowing it will cover the bills, and then I know exactly how much I can spend.
Contrary to popular advice, I always advise people not to maintain a budget. I think it’s helpful to put one together once a year, but certainly not to maintain meticulously. It’s distracting, anxiety-provoking, and largely unhelpful.
Point #2 (“we were surprised to discover how little discretionary income we actually had each month”) is an important point and one that lots of people miss. Many people decide on what they want before they consider their needs and whether they can afford it all.
Carl, I actually get incredibly excited when the new budget cycle comes around. I think it’s because of the paradigm shift of “budget” vs. “spending plan”, along with help from Dave Ramsey– my thoughts about making the next month’s spending plan is more in the realm of excitement about how much closer I am to saving money for that Vitamix, or the amount of money we’ve socked away for a Master’s degree. When I stop paying attention to the plan, THAT is when the anxiety creeps in. Perhaps other people see it differently but having a new budget every 2 weeks keeps us confident in our saving/spending tendencies and looking forward to the amount of money we have left over each cycle to shift to savings (or a date night!).
Caitlin, it all depends on the relationship you have with money. If hitting refresh on the budget each month gives you peace of mind, I say go for it. That would stress me out to have such a real-time grasp on my budget. But I know it works for some people.
What is it about not refreshing that makes you anxious? Is it the not knowing where you stand on your plan?
I used to get a lot of anxiety about money – I’m a Si for parent on a low income and every time the fuel light flashed I got a horrible feeling and whenever bills arrived etc. I’ve had a budget for a year and have been roughly following Dave Ransey plan for variable
Income and I feel so much less anxious that it is amazing and I love that I can spend without guilt and know where the money for everything is coming from. For me a budget has really helped reduce my anxiety. It’s been a steep learning curve but so worth it!
Keri Misawa says
We have been using Mvelopes online budget system, but I have been frustrated by not being able to keep up with every expense and getting behind. This post has given me a new angle on it and I feel more free already! Thanks!!
Pamela R says
I just wanted to express a quick thank you for this post. My husband and I have been together nearly 20 years and it looks us half of that to figure out that a traditional budget didn’t work for us. We started writing down everything we spent. Everything! And we came up with a plan that is exactly what you’ve stated above. I’m so glad for someone else out there that it won’t take them 10 years to figure out what you have outlined so clearly.