“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.
Summer says
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.
Shelliott62 says
Love it…
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.
Lucy says
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.
Peggy says
If you’re an Amazon Prime user, The Ads are automatic unfortunately.
Ari says
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.
Shelliott62 says
Exactly.
Ruth says
I don’t see any ads at all. Maybe as Peggy said it is due to something on your end?
Natalie says
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.
Dannielle says
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.
nilima says
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
Susan says
Any tips or advice on how to do this this system with a seasonally variable income?
Diane says
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.
Emielle says
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.
norma says
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.
Kat says
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!
Josh says
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).
Melissa says
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.
Biddy says
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.
Shirley says
Melissa, groceries are not a discretionary expense.
Shelliott62 says
Maybe they are to her. Maybe she feels she needs to spend less or wisely. This seems to work for her.
Shelliott62 says
Melissa,
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!
Jenn says
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.
Cathy says
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.
Jamie says
Too bad they went to a subscription business model. Very disappointing.
Jeniece says
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.