“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.
TPT says
Everyone above sounds like they pretty much have it figured out (for the most part), and I’m happy for them.
My husband and I, on the other hand, are barely scraping by. We have overspent and are both very underemployed. Now we are facing eviction, have zero in savings, and have really screwed up. So we are always in fear, and robbing Peter to pay Paul. He is 61, and I’m 60, and neither of us have retirement, no savings, and definitely no discretionary income. We don’t have credit cards, and only one car payment, which is 250.00 a month. All that’s owed on it is 600.00, and we can’t even pay it off. I think it’s really too late for us, and I’m terrified. He hasn’t ever wanted a budget, aka savings/spending plan. :( We are scared and screwed.
Betty B. says
I’m not sure this information will be helpful to you, but here goes.
Sign up for the senior discount program at your local utility district.
I am saving $37.00 a month.
Sign up for the affordable connectivity program (ACP) for internet. Century Link, Verizon, Comcast, etc, participate in this program.
I pay $20.00 a month.
Check out your local library for movie rentals. There is also the Kanopy app, which, I believe is through the library.
Also check out your senior and community centers for discounts and free things.
I believe Joshua has a plan where you don’t spend anything for one month except for the necessities and see how it works.
I love making bean soup. Something very simple is lentil soup. I do like to use my slow cooker for this and other soups, but it is not necessary.
Maybe you could make out your own budget and see how it goes. It just might convince your husband that this is a good idea. You might also try American Consumer Credit Counseling online.
I just wanted to reach out and give you some hope. I have always appreciated other people when they help me.
Good luck!
S says
I feel overwhelmed I want to save my home needs many repairs I want to eliminate debt how to do it all and stop working so much holding my breath hoping I’m gonna cover all my bills
Maria Martoral says
We are retired so we follow a spending plan very similar to this method to make sure all our bills are covered. However, since we are no longer employed, we now substitute retirement savings with sinking fund savings. It’s a set amount each month in addition to our regular savings that covers all those unexpected emergencies like a new car battery, a broken fridge, a broken pipe, a broken air conditioner etc. It has literally been a life saver!
K says
How do you decide how much for your sinking fund?
Gayla Holder Davis says
We started an online savings account at Ally Bank for our sinking funds. They had a better than most interest rate and they allow you to subdivide the account with “buckets”. We have Christmas, new car, vacations, major home repairs, annual fees like flood insurance and HOA fees, etc. We do have a budgeted amount for each month, but if we have spend less in other categories, we can decide which bucket to put more in. If we have less, we adjust accordingly. All our discretionary money goes here. If we decide to buy something like a TV out of discretionary, then it doesn’t go into the sinking funds that month. Seeing those buckets get filled up is good motivation.
Chris F says
You should rent a room to bring in some money to pay for those repairs. If that’s an option
Ela says
just PLEASE be careful with charities !!
as THIS IS – a wasted money !!
/please read about it !!
– HOW MUCH money is actually going to those in needs or the case..
about 20% – rest is THEIR administration – so – wages, building, CEO etc…/
instead – help a specific person or some family.
I do that
everywhere where you turn your head – you will see someone in need.
Deserée says
Agree whole-heartedly with the charity bit.
I prefer to help out the people I know or in my community directly instead.
Anna says
This post is really valuable, and I like the spending plan and “fixed cost” of items. Only the charity part does seem “unnecessary” to me, when you can be a help and assist in your spare time, whenever. I used to do that until I considered I gave too much of my time to the point I forgot to use it for my kids and myself. Aware of my spending habits with this spending plan is genius because I won’t regret doing it uselessly. All in the check and balance way of doing it. I feel like it was unfair to one or the other person to have to more or to contribute.
Lee says
Are you familiar with Charity: Water? 100% goes to providing clean drinking water. They have a unique set up where set donors have volunteered to cover admin costs years so 100% can go to water projects. You can actually follow your funds on a real time live map and see the local maintenance of these wells years later.
D.C. says
OK Maverick!
-Husker
joshua becker says
Cute.
TJ says
I love the less tedious nature of this. However…how do you “control” this? Just using cash? Most of my purchases are on the card and it’s easy to lose track. Yes, you can go at the end of the month and review, but…
Just get e.g. $500 out in cash and pay everything cash?
joshua becker says
This method doesn’t track your spending on a transaction-by-transaction basis. It’s just requires a one-time evaluation of your fixed expenses compared to your income in order to better understand your financial situation and margin. To calculate adjustments that you desire to make (or were forced upon you), you would complete the process again. There is no need to pay with cash – it’s about taking a snapshot at a moment in time.
Deserée says
I guess I do a version of this method along with the 50-30-20 rule. If any part of that exceeds it’s allocation, then I have to take a deep look at my finances and make some decisions. To help, I’ve opened two accounts one of which is specifically used for discretionary spending. Everything in that account is what can be spent on non-necessities. The amount is 30% of my paycheck that I have directly deposited into that account specifically. Having one account that holds all of my money for my necessities and one account that holds my discretionary income was a game changer for me. And it’s not a lot to manage, in my opinion.
The 50-30-20 bit is comfortable for me, so I would say it’s worth a look into.
CG says
I use the 2 bank account method also. Has helped a lot to have one bank account for the monthly bill paying, and I know those are always covered. The balance nice in the discretionary one can flow up or down as I want it to.
Sabrina says
The two bank accounts is genius! I don’t know why I haven’t thought about it before, I do have two banks!
K says
What’s the 50-30-20 rule?
peggy says
We never needed a plan. Just don’t buy stuff you absolutely do not need, and take care of what you have. Prepare healthy meals at home. Spend time outdorrs. Put God, family and people first. Be generous when you can.
catherine says
This is exactly how I “budget”–and I’m no banker! But I am religious about tracking spending.
With my budget software (YNAB) I use the broad categories of “needs” and “wants.” “Needs” are the fixed expenses as well as very basic survival needs. In other words, I want to know how much do I HAVE to have to get by from month to month.
I depart from Joshua’s system in that I do budget my “wants” in order to track if what I spend my money on is in alignment with my goals and values or not. When I need to cut back, this is the category I target.
I was inspired by Elizabeth Warren’s book “All Your Worth” which says that your budget should represent certain percentages of Needs/Wants/Savings.
I’ve also been inspired by the classic book Your Money Or Your Life by Joe Dominguez and Vicki Robin.
Paula says
Thank you for sharing this. It is very much an affirmation that I am on the right track!
Marilyn Luster says
I created a monthly budget/spending plan using a spreadsheet, going several years into the future, using 12 columns for each year. I put all the income at the top, then subtract all the expenses and savings. The ending balance is copied over to the top of the next month. It really helps to see what I’m spending and how much is left over at the end of the month. I have two credit cards that I pay off each month. One card I use to automatically pay all monthly utilities like phone, cable, electric, etc, and the other card I use for groceries and other expenses. The cards earn a few hundred dollars each year in points that I apply back to pay the card balances.
Ivory Wilderman says
I have an account for fixed expenses which are due monthly.
I also have an account for annual expenses such as Costco/Prime/AAA memberships, DMV for car tags etc. I calculate all of these expenses and divide them by 12 and put this amount in a separate account each month and I pay these expenses as they are due separately from fixed and discretionary spending.