Outside of the personal finance world, the b-word is a dirty word. No, not that word. I mean BUDGET. When someone says you should budget, you probably have visions of eating a bland peanut butter sandwich every day for lunch; having to shamefully text your friends that no, you can’t go for drinks after work, because you’re on a budget; and angry people glaring at you from the line in the grocery store as you break out your ginormous coupon binder.
Don’t worry – we don’t use the word budget here!
A budget gives you cold sweats and a knot in your stomach because it raises feelings of deprivation and sacrifice. Throw that out the window – money is meant to help you achieve your goals and live your life the way you want. Sure, money should allow you to survive, but it can also enable you to THRIVE. There is no point in sacrificing the opportunities to have fun, be spontaneous, and enjoy life in your twenties just to save a couple bucks. At the same time, there’s no reason to go blowing your money on things that don’t truly align with your goals for your life. Frankly, that latte, smart watch, or overpriced cocktail do not propel you towards reaching your personal, financial or life goals. In the end, being free from the weight of student debt, putting a down payment on a house, financing your own business, or funding your passion for world-travel is going to mean a lot more to you than any consumable or object you purchase on a whim.
So how to balance the two: fun now and wealth later? This is where a Spending Plan fits in.
A Spending Plan gives you a framework for how and where to spend your money in order to achieve your goals and live your life in alignment with your values.
The Top 2 Reasons to Create (+ Follow) a Spending Plan
- A Spending Plan gives you permission to spend your money… where it matters most. Balancing now and later, fun and future, immediate and delayed gratification – without guilt, deprivation or regret – that’s what a Spending Plan is all about. Flip the script of being deprived or making sacrifices due to your “budget.” With a Spending Plan, you are allowing yourself to put money towards your hobbies and passions now, while also creating a plan for contributing to your savings goals, paying down your debt, or investing.
- You can’t “frugal” your way to being rich. However, reducing the amount of money that you need spend in order to live will help you save more quickly, and will help you save more… for the rest of your life. Saving money is just one side of the Income/Expenses coin. To create wealth, you need to both increase your income and manage your expenses.
Ready to make your own Spending Plan? Keep on readin’!
How to Make a Spending Plan
1. Name Known Expenses
You know, all those things that satisfy the “survive” part of survive & thrive. What do you already pay for, and how much does it cost? Keep an open mind about these expenses, because they might not make the final cut into your Spending Plan (ahem, Hulu subscription), or at least, they might not be as large of an expense as you originally thought. Known expenses might include Housing, Transportation, Groceries, Clothing, or Household Items.
2. Define Your Goals
Here comes the thrive part! Figure out what you want to achieve this year and it will be a piece of cake to figure out what you want your money to do for you this year. This should include what you might think of as saving goals – after all, you do “spend” your money by paying off debt, investing, or creating an emergency fund, since once that money is allocated it can’t be used for a different purpose. Do you want to pay off your debt? Do you want to fill your belly with delicious food and beer? Do you want to have outdoor adventures with friends and family? Do you want to learn a language/sport/skill? Defining your goals will give you the rest of your Spending Plan categories, which may include things like Vacation Savings, Enjoying Life, Investing, Dining, Alcohol, Student Loans, Sports, or Education.
3. Reflect on Your Values
“Put your money where your mouth is” is the main idea here. Take the Spending Plan categories you’ve just defined, based on your known expenses and your goals, and see if they align with your values. Order the categories from most aligned with your values to least. For example, if you value experiences over objects, your Experiential category would be higher on the list than your Objects category. If you value giving to charity more than your car payment, put Giving higher than Automotive.
A Spending Plan gives you a framework for how and where to spend your money in order to achieve your goals and live your life in alignment with your values.
4. Know Your Income
Before you can start putting dollar amounts in your spending categories, you have to know how much money you have to allocate. It’s probably easiest to estimate this based on last year’s income. This is easy if you filed taxes last year – just look at your income after you paid taxes (factoring in your tax refund, if applicable). Or, if you just got a job, look at your salary and calculate your after-tax, take-home pay (or net income). We’ll call this your “Spending Money” (clever, right?).
5. Split It Up
Now you can start allocating your Spending Money to different Spending Plan categories. Remember, you are giving yourself permission to spend your money on these things. Yes, even drinks at the bar, books, or massages, if that’s your thing. Don’t feel guilty – you defined what you value and how your money can help you achieve your goals, now you just have to split it up accordingly.
There are two ways you can do this – by knowing the amount you would like to spend monthly on a category (then multiplying that amount by 12), or knowing the amount you would like to spend yearly on a category. I like to know both my monthly and yearly allocation, so my Spending Plan includes a column for both amounts. This makes is easier to have a quick view of whether my spending has gone to plan for each month.
I recommend beginning to allocate money to each category starting at the top of your list. Those are the categories that should have the highest amount of spending anticipated. So, what happens when you’ve allocated all of your Spending Money and there are still categories with no dollars at all? Well, you’ve essentially determined that the categories with money in them are more important than the categories without. Read on to the next step about shifting money around for some tips on handling this.
6. Shift Money Around
What do you do when there categories left over, with no Spending Money in them? Shift money around, of course. If a category is a non-negotiable, like food, you’re going to have to find the money somewhere (also, maybe it should be slightly higher on your list. Just sayin’). If the category is completely negotiable, consider cutting it from your Spending Plan altogether. And be sure to question whether certain categories are really “non-negotiable.”
Ask yourself the following questions. If you can answer yes to all three, it’s time to axe that line item from your Spending Plan.
1. Will I survive if I don’t spend any money in this category this year?
Hint, if the category is food, probably not. If the answer to the question above is “probably not”, but the category is still quite low on the list, look into ways of decreasing this expense. For food, you could shop at a discount grocer and cook exclusively at home. For rent, you could get a roommate (or four), or move back in with your parents. Remind yourself why the other categories are more important to you, and this will improve your resolve to figure out a way to make these expenditures as low as possible.
2. Will I realistically not spend money in this category?
If you’re trying to quit spending money on something you buy every day, like your morning coffee, I don’t recommend doing it cold turkey. You’ve realized that lattes aren’t a high priority for you, or that you can make coffee at home for free. Following a Spending Plan is kind of like dieting – if you cut out all the foods you like to eat suddenly and don’t allow any cheat meals, it’s highly likely that you will revert to your old habits. Build in some wiggle room in your Spending Plan in order to avoid guilt over occasional purchases that may lead to throwing out the whole Spending Plan for the rest of the year.
On the other hand, if spending in a category is due to a subscription service, such as Hulu, Netflix or Amazon Prime, you can cancel it right away and boom! Guaranteed you will not spend any more money in this category.
3. Like it or not, do I have to spend money in this category?
There may be fixed expenses that you know you will have to spend money on, like it or not. If you don’t like it, your only option is to try to reduce spending in those categories as much as possible. I personally track my spending in categories that I don’t have a set amount of money allocated towards, like Junk Food, Personal Loans (to friends and family), and Shipping. This is because I know that they are likely to be expenditures, however I want to limit them as much as possible. An integral part of this is not giving myself permission to spend money on them, while also being realistic about the fact that occasionally I will spend small amounts of money on them.
Figuring out what YOU want is the first step to figuring out what you want YOUR MONEY to do for you.
The Final Step
If you just read all the steps above, you now know the basics of making a spending plan that is unique to you and your financial situation. The last, and most important step in this process is actually sitting down and creating your spending plan.
Don’t wait until next year – do it now.
Don’t wait until you have a certain income, savings, investments, etc. – the plan will accelerate your path to those destinations.
Don’t wait until you’re debt free – the plan will help you get there.
Don’t wait for the “right time” – it doesn’t exist.
Create your first spending plan NOW.
It doesn’t have to be perfect. In fact, I can tell you that it won’t be. I’ve been doing this for years and I learn something new every year. Accept the fact that creating your very first spending plan is going to be a process of trial and error. Life is a process of trial and error.
I encourage you to harness this powerful financial tool, your life will be better for it. It will help you live and spend in accordance with your values, priorities and goals. It will help you enjoy your life to the fullest, while at the same time pursuing financial independence.
Other Resources
If you want further guidance, I suggest you visit the posts below. These are for your information, not a tool for procrastination. You have what you need to get started right now. Don’t delay – create your Spending Plan today.
WANT TO REMEMBER THIS? SHARE THESE TIPS TO CREATE AN AWESOME SPENDING PLAN!
