“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.
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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.
Sabrina Q. says
Great post! I have done this for over 20 years but never had a name for it. I always felt that budgeting was so restrictive. But, a spending plan allows me to make a choice of what to spend and where to spend it. Brilliant! Thanks.
seth says
I’m sorry, but since nobody else is saying it, I gotta say it. THAT’S YOUR BIG SPENDING PLAN???? Determine your net income, pay your monthly bills, then spend the rest however you want?
Gee, thanks for the advice.
Sue-ellen Mahony-Walsh says
I recommend reading ‘Your Money or Your Life’ by Joe Dominguez and Vicki Robin. I’ve followed the ideas in this book for five years. It has enabled me to work part time and save whilst raising a child. I enjoy a balanced lifestyle and don’t feel that I miss out on anything.
Rose says
I pay myself first twice. 15% of gross income for retirement, and roughly 20% of my net. Of the net, I reserve a fixed larger portion for an emergency fund, and a smaller portion for discretionary expenses like small vacations, entertaining out of town relatives, donating to specific causes, and minor car maintenance. The remainder of my check covers the rest of my bills. This system works well for me since I’ve FINALLY learned to examine my needs and purchases.
Alexandra Marie says
This post is really helpful ! I just graduated University, I just found my first apartment, and I’m trying to slowly be more independent from my parents (regarding financial means). This post is perfect because the budget plan I have been trying to set up is frustrating, whereas this spending plan is simple and easy to understand. I will get right on creating my spending plan ! Thank you !
Alexandra Marie
Tiff says
I love the change in the mindset. Spending plan it is! I have been struggling with years on making a budget, nothing down all my purchases and I can never keep it up. This spending plan sounds like something I can do. I’m starting today.
Brian says
YNAB (mentioned earlier in the thread) is the solution to every single issue raised in the comments. It is a zero-based budget and allows you to allocate income to different categories on a monthly basis, including categories that you don’t regularly use (rainy day fund or holiday gift funds, for example). You can edit your budget if your needs for the month change. And best of all, you don’t have to deal with multiple checking/savings accounts. With YNAB, I have about 30 spending categories with one checking and one savings account. YNAB is a budget + “spending plan” rolled up into one east-to-use tool.
Leslie says
I’ve always done something similar, but I used to have a set amount of spending money (because you need something, even though the amount through my twenty-five years of doing this has varied greatly) and also savings. That’s how I paid off my school loans and saved for a down payment on a house in a very expensive city.
Sherri says
My husband and I have been using this approach for longer than we’ve been married (almost 10 years). Works wonders (especially now that we don’t have any credit cards — we can really appreciate it).
Dennis Esser says
I actually believe this is a great advice for mastering your personal finances. It’s easy if you want to save money spend less. But I would add that you should save up an amount of money for ‘bad times’ (hopefully they never come). It doesn’t have to be much but you’ll definitivly feel safer.
Greatings!