“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.
Kurt says
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.
Joy says
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.
Renee Brosseau-Trembly says
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!!
James Kline says
You might check if it’s cheaper to have cell phones but no land line.
Is Internet available at the library?
Pat says
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.
Michelle T says
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.
Susan J Hall Sartain says
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.
Juli says
I would love to see some sorta pic to go with this idea…creative and may help others. , i.e. ME
Kim says
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.
Carolyn Bostic says
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.
ren says
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.
Colleen says
Thanks. I didnt know my plan had a name. Because my husband and I share our account i take it one extra step. Our pay is deposited in a chequing account that is not attached to our banking card. I transfer the spending amount to the other chequing account once i have calculated our monthly bills that way i dont have to try and remember how much i need to leave as a balance.
Lolly says
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.
Chris says
Love that!! “Peter”!!
Monica Benninghoff says
Great advice. Jazzercise Mims (FL) is focusing on 12 monthly goals rather than single New Years Resolutions for 2015. Our July focus is on Investing/Saving. Needless to say, your post is timely and relevant and is being shared with my customers. Thank you!
Susan says
my challenges that my income varies from month to month so I’m not sure how to use the spending plan effectively. Any suggestions?
Gideon Leong says
Dear Joshua, I find this article is really helpful. I wish I could read more of your posts regarding personal budgeting or investment, if possible. Thanks.