It is an unfortunate truth. The word budget has become a four-letter word. Most people avoid making one, at all costs. To move past this negativity, money professionals suggest creating a spending plan instead of a budget. The goal is similar, but broader, and without the perceived restrictions of a budget.
What is a spending plan? It’s a positive overview and understanding of your money.
According to Jeff Dortch, financial planner and member services professional at Civic Federal Credit Union, people tend to overly focus on income and bills. While those are important, he says “it’s really about gaining an understanding of how your money moves, what parts really matter, and how that knowledge can help you better operate your life.”
Dortch refers to creating a spending plan as learning the behavior of healthy spending. Developing an understanding about your money; how much you have, earn each month and how much you need to spend are building blocks for financial health.
The entire process of creating a spending plan can be broken down into steps that can help you become more money aware.
Step #1: Spend on Yourself
This may be surprising, but when creating a spending plan, it is important to plan to pay yourself first. That is, include the accounts that will be the foundation of your future success. As Dortch says, “they are not going to fund themselves.”
- Your goals: These might include getting an apartment, buying or renting a home, taking classes or going to college.
- Emergency savings: Plan to add a little each month to build an ideal savings of 3-6 months of living expenses.
- Investment accounts: Many employers offer 401-K plans or other planned opportunities to save for retirement. Jeff Dortch shares, “It is easier to put a modest amount of money away in your 20’s versus playing catch up in your 40’s or 50’s.”
Step #2: Plan Your Fixed Spending
The next few steps are the building blocks for financial health. We all have expenses or bills that stay the same each month. These include streaming services, rent, mortgage, or car payments. These amounts typically do not change and are fixed. Dortch encourages you to include your semi-annual spending such as car insurance or professional dues.
Step #3: Plan Your Variable Spending
This next step is to list your spending for needed items with prices that change. These include food, gas, utilities or entertainment.
Step #4: Plan Your Casual Spending
Here, you can list your average spending for birthday gifts, lunches with friends, or other extras such as hobbies or an occasional collectible or video game.
Step #5: List your Income
It is important to list your net income. That is the amount you actually take home. Your net income already has taxes and other monies taken out. It’s the amount of money that is deposited into your bank account from your employer or that you pay yourself, if you are a small business owner. For the purposes of this spending plan, net income is your true income.
Step #6: Compare Your Actual Spending to Your Spending Plan
For the first month, simply track your spending. At the end of the month, compare your actual spending with your spending plan. Getting a real picture of how much money you actually spend each month allows you to see opportunities for adjustments.
Jeff Dortch reminds us that setting a spending plan can help you reset how you behave with your money. He shared, “A spending plan gives you clearer perspectives, increased awareness, and more control of your spending to help improve your broader decisions about money.”
Disclaimer: You + Money blog posts are provided for informational purposes only and not intended to replace the advice of a financial, legal or accounting advisor.