“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.
Jenn says
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.
Renata says
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?????
Cat says
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.
Wendy says
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.
Sharon says
Brilliant! This totally resonates with me.
Kristen says
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.
Jan says
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.
Sandra says
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.
Talia says
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?
Ruth says
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.
Erin says
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
Mike says
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.