Many people don’t like working with budgets. They think they are complicated, time-consuming, scary; even the word itself — budget — sounds ugly.
But everyone needs some way to keep their finances on track, especially if they’ve recently incurred a huge, unexpected expense, lost their income etc.
So if you hate the idea of creating a budget, don’t worry. Instead, you can make a spending plan.
What’s the difference between a spending plan and a budget? Well, a spending plan allows you to choose what you must spend money on each month, and then gives you the freedom to do whatever you want with the rest.
Plus, it’s more fun to think about making a spending plan than a budget. Everyone likes spending money, right? You’re just going to plan how you spend it.
“Think of a ‘spending plan’ as a roadmap for how you’ll spend your money, rather than a list of ‘don’ts’ that restrict your spending — even if the end result is essentially the same,” said Andrew Schrage, CEO of Money Crashers, a personal finance site.
It’s also relatively quick to create a spending plan; you can probably do it in about an hour. Let’s start by creating three “spending buckets”.
1) Pay yourself first
You may have heard financial experts use the phrase “pay yourself first” and wondered what it meant. Well, it’s basically just a fancy way of saying that you should save some money for later, but do it when your paycheck arrives, before you start spending — not at the end with whatever you have left over.
Paying yourself first fits nicely into a spending plan, because it means you’re going to spend money on yourself first. It doesn’t mean you’re going to jump on the computer and order some new clothes (though we’ll get to that in a moment). Rather, you’re going to set some money aside to spend on yourself down the line.
You can call this account an “emergency fund” or a “vacation fund” or “college savings” or anything you’d like. But don’t get too attached to what you label it. The idea is that you create a pot of extra money to use later on something you really need or want, instead of right now as part of your regular monthly expenses.
And when your savings get large enough, you can split the money up among multiple accounts and have a different label for each one. But for now, keep it simple, and just make sure you set aside something every month however you can.
2) The must-haves
Next, it’s time to determine what you absolutely have to spend your money on. This probably includes rent, groceries or utilities — the bills you need to pay to survive.
There are two types of must-haves — fixed costs and variable costs. Things like rent or a mortgage payment are usually the same every month, meaning the amounts are fixed. They’re easy to calculate since they don’t change very often.
Other fixed expenses likely include your car payment, insurance for your home and auto, your cell phone bill and so on. (This is also a good chance to see if you can lower any of these costs. (Check out this guide on how to take 30 minutes to reduce three major categories of household expenses for ways to cut with a minimum of pain.)
On the other hand, expenses like groceries or household items can change each week, so it’s tougher to put a number on them. You’ll have to make an estimate based on how much you usually spend at the grocery store and how often you go.
Don’t worry about being perfect here, and give yourself a little extra room by guessing slightly higher than lower. Some utilities, like your electricity bill, may also change from month to month, depending on the season. Again, just give a rough estimate on how much you’ll spend on them.
But remember, this bucket is only for the things you absolutely have to spend money on. You may adore buying perfume or cologne, but it’s not a must-have. We’re not saying you have to get rid of it, just that it doesn’t go in this bucket.
Also, when you’re putting together your “must-haves” bucket, there’s one more important extra to include: the “expected unexpecteds.” Those are the random bills that seem to pop up like clockwork every month, but each time for a different reason.
3) The fun stuff
OK, this is the part we’ve been waiting for. Some experts like to call this the “discretionary expenses” bucket, but that’s just a fancy way of saying it’s the stuff you spend money on that you don’t 100% need. Which, by the way, doesn’t mean that you shouldn’t spend money on it. Even in tough times, you need things to inspire you and keep you going, which is fine, as long as you’re not overspending on them.
But with your spending plan, it’s easy to know just how much money you can afford for the fun stuff. Because whatever you have left after your must-haves and paying yourself first is for you to spend however you want.
In a budget, we’d try to account for every penny in this bucket. But with a spending plan, it’s up to you to decide as you go, and it’s perfectly fine if it’s not the same items every week or month. You can divvy up the overall total of this bucket however you want — buy new clothes, order a nice meal, get a new video game. But once the bucket is empty, you can’t spend any more until the next month or paycheck.
What if you don’t have any money left to put in this bucket? That means you don’t have any room to spend beyond the basics, which may be the case if you’re on a limited income right now. But don’t despair. If you want money to spend in this bucket, you can either work on reducing your expenses in the first two buckets, or increasing your income with a new job.
However, one thing you absolutely should not do is go into debt by spending money in this bucket.
A spending plan should change as time goes on
As you put your spending plan together, don’t think of it as final or permanent. For one thing, you probably won’t get it exactly right the first time you do it, and that’s fine. But it’s also going to change as you go anyway, which is why you shouldn’t invest a ton of time trying to make a perfect spending plan. Just make it as good as you can to start.
Then, as your situation changes, you’ll want to sit down every month for 20 to 30 minutes to take a look at your spending plan and see if you need to adjust it. Perhaps you got a new job and now have more money coming in, so you can increase how much you pay yourself first, or have more left over for the fun stuff.
You’ll also want to revisit your spending plan if there’s a major change in your must-haves. Maybe your rent increases, or you downsize to a smaller car and have a lower monthly payment as a result. Make adjustments as you go so you have the most accurate info on where you’re spending your money.
Just remember that your spending plan isn’t a rulebook telling you what you can and can’t do. It’s only a guide so you can see where your money goes each month, and then be comfortable knowing what you can afford.