Building A Spending Plan

If you’ve said to yourself that you wanted to get a better handle on your household finances, I’m sure you’ve seen the suggestion that you should create a budget. Are you dissuaded because you feel that it is too much work? Because budgeting doesn’t sound like fun at all? Because it sounds constraining?

Then let’s get rid of that word. Instead, what we want is a plan to answer two questions about our money:

  • Am I spending more than I’m making?
  • Where is my money being spent?

After answering those two questions with a spending review, you can put together a spending plan to answer the question, “Where do I want to spend my money?”

Where Does The Money Go?

At a high level, you probably already have an idea of whether you are spending more than you are making. Perhaps the credit card balance is going up. Or you seem to have enough to spend but it is all gone at the end of the month. The spending plan will tell you where you are spending your money.

Once you look at the numbers, you may be surprised at how much you spend in one area or another. That is a good thing because this can be used to determine how you want to spend your money.

When it comes to the tools for this exercise, if you are paper-based you can do this with a spreadsheet and enter the information. If you are more comfortable with the digital realm, you can use online tools that can download the information from your accounts into the tool saving you some time.

Gather The Information

If possible, I recommend gathering six months of transactions from your bank statements and your credit card statements. If that is too much, then start with just one month’s worth of information. It won’t be as good a picture of your total expenses, but it will be better than nothing.

The next step is to categorize these transactions. Keep the categories simple, but not too simple. You may be tempted to just use food as a category, but you’ll want to separate that out into dining/take-out and groceries so that you can see the difference between those two. You may want to lump all auto into an auto category, or you may want to have gasoline separate from the rest of your auto expenses.

Here are some categories you may want to use for expenses: groceries, home-repair, car, dining/take-out, utilities, mortgage, loan repayments, clothing and credit card payments. There may be others that would make sense for your situation as well. Also create a category called income and list all of your take-home pay into that category.

Add up all of the amounts in each category to get a total spend for each. If you were using six months of information, divide those totals by six to get a monthly amount.

At its most basic form, a spending plan lists all of the different types of income you have and totals that together. Then you list all of the things you need (or want) to spend money on and add that up. Subtract the expenses from the income. The spending plan process helps you get those two numbers so that the difference is zero or positive (money left over at the end of the month!).

Now it is time to review the information to see what you found.

Where Does The Money Go For You?

As you look at the information, see where you are spending the most money. Is the total spending more or less than the total income category? Did any numbers surprise you? Did you realize how much you are spending on dining out? Did you realize how much it costs to maintain the car or cars? Are there any areas where you want to change your spending? Now let’s look at creating your desired spending plan.

Create A Desired Spending Plan

Photo of man putting coins into piles by Towfiqu barbhuiya on UnsplashFirst, figure out how much income you have. That’s going to be your not-to-exceed number. Then list and add up all of the must-pay expenses such as housing (both mortgage and maintenance), car (both loan payment and maintenance), utilities, minimum payments on debt, and insurance. These are your Needs. You might have some Needs that aren’t each month, but only once a year. For those, take the total amount and divide it by 12 to get a monthly number. But don’t count them twice if you already have them in your six-month list of transactions you categorized earlier. This also takes care of once/year or occasional bills by allocating some money each month toward these bills so that when it is due you have the money to pay it! Next, list of the things you like to spend money on such as eating out, streaming services, phone or computer apps, clothing and food. These are your Wants (although food could fall into both Wants and Needs). Finally, document your savings or debt that need to be paid. These are your Savings/Debt. A very simple plan might be a 20/50/30. 20% goes to paying off debt or adding into savings (because you want to prioritize that first). 50% is allocated to Needs. 30% is allocated to Wants.

It might take a while to tweak things around, and your 20/50/30 may skew to higher than 50% Needs depending upon how much of your income is used for Needs. After you’ve put that plan together, then the next step is to follow it.

Tracking To The Plan

Each month you’ll need to keep track of things to see how well you are doing and make adjustments as you learn to stay within your spending plan. If you like to do things online, you can use something like Quicken, Simplifi or You Need A Budget to automatically pull information on spending and track this for you. Or you can go with a more manual method of tracking it in a spreadsheet (either Excel or a paper accounting book).

When you have spent the total amount for a category, then stop spending there. After a month or two, revisit your plan to see if you need to make adjustments. You want to use this to help spend where you want to and not spend where you don’t. Keep it flexible. Other times when you may want to revisit the plan category amounts might be if you get a raise or a new job, or some of your Needs category amounts change.

Remember that this is a financial tool to use to help you spend money where you want, so it needs to stay simple enough that you will actually use it.