A “Spending Plan” is exactly as it says – a plan of what you will be spending each month. There are usually two parts – your “fixed” spending and your “variable” spending. The fixed part is usually the same every month, with things like rent/mortgage payments, grocery bills, insurance, and car payments. The variable part changes a lot from month to month, and can include things like Christmas shopping, buying new furniture, and paying for repairs.
You can then balance what you need to spend for the month with your take-home pay, and use whatever is left over to allocate as you wish – going out to the movies, adding to your investments, or keeping in your savings account.
How is a Spending Plan different from a Budget?
Spending Plans and Budgets are similar in a lot of ways – you’re making a list of your expenses in order to allocate your income. The biggest difference is that when you make a budget, you are allocating how you are going to spend just about every dollar you earn – take a look at our Home Budget Calculator and see how many settings you need to make!
A budget also gives you allowances that you cannot go over. For example, you might have a $150 food budget for yourself while you are in college each month, assuming that you will be buying groceries and cooking nearly every meal yourself. If you end up going out with friends a few times more than expected for burritos, you might go ‘over budget’, and you know that you will have to take that money from somewhere else in the budget to make it work.
A Spending Plan, on the other hand, is much more simple. You make your list of fixed, hard expenses that do not change from month to month, and then each month you add your other essential expenses. This means you are left with your ‘discretionary income’, or the money you can spend on whatever you like. If you want to use your discretionary income on a few extra trips for burritos, go right ahead! This only means you have less to spend on other discretionary expenses, not that you went ‘over budget’ and need to start from scratch.
Spending Plan Terms
Fixed And Variable Spending
When you are separating your spending between “fixed” and “variable”, your rule-of-thumb should be that if you need to change an item month-to-month, it should be part of your variable spending, whereas if it is something you don’t have the ability to change easily, it should be part of your “fixed” spending.[rich]Add how much you spend on clothes and fashion to your spending plan. This helps you visualize how much you value your style versus other essentials! If you skip one $60 shopping trip per month, that will add up to $720 per year![/rich]This also means that when you want to start controlling your spending habits to increase your savings and build wealth, any spending you can reduce from your “fixed” expenses will have a bigger, long-term impact. For example, if you decide to move into a new apartment, a $50 difference in rent will not make a huge difference in your per-month spending, but it adds up to over $600 per year. In contrast, if you skip out on a variable expense, like a dentist appointment, you might get a one-time savings, but it will make a big impact on your long-term strategy to build up your savings, investments, and wealth.
When you are building your spending plan, it is essential you specify how much you are earning each month as your take-home pay (how much you actually deposit in the bank), not your salary, or pre-tax income. This way you can build an honest, realistic plan based on what money you actually have at your disposal.
Savings and Investments
Your savings and investments are also extremely important in a spending plan, but where they fit in will change over time. For the first few months of using a spending plan, your savings and investment will be what is ‘left over’ from all your other discretionary expenses.[rich]An emergency fund should be part of your saving strategy. This is a fund that you maintain a minimum balance, depending on your net worth, as easily-accessible funds in case of an emergency.[/rich]Once you have a few months of experience to know how your spending usually falls, you can take your average savings and move it into your ‘variable spending’. You will then need to decide how to split this between a cash savings account and other investments, but you will be able to make regular monthly deposits in both. You know that some months you will be able to save more than others (around November and December you might need to spend more on gifts, for example), so you can adjust your savings and investments accordingly.
Once you are more established with your spending habits, you can move part of this expense into your “fixed” spending – this is to remind yourself that no matter what, you know you can afford to put a certain amount of money aside every month to prepare for emergencies, retirement, or investing for the future. You can still keep a smaller amount in your variable spending – often people will separate their retirement savings as a ‘fixed’ expense, with their other savings and investments as ‘variable’. More importantly, make sure to remember to put anything you have left over from your discretionary spending every month directly back into your savings!
Saving Versus Investing
Saving and investing are similar, but they are not the same. Saving can be almost any form of stored value – a savings account, government bonds, even cash hidden under your mattress. Investing, on the other hand, involves some risk. You can buy stocks that lose value, for example, while money saved in a savings account will retain its value.
Saving in your retirement account can be both. Low-risk stocks that pay dividends can stand aside government bonds and other low-risk assets as part of your savings. Investing is generally considered to be part of saving for most people, but as your investments gain more risk, you should consider them less of a part of your savings plan.
Pay Yourself First – A Saving Strategy
The idea behind “Pay Yourself First” means that you should think about your savings and investments as a necessary expense. By adding in your savings and investments to your Fixed expenses, you are reminding yourself that it is not an optional part of your personal finance strategy. This is usually accomplished by automatically depositing fixed amounts every month from your bank account into your savings or retirement account with a direct deposit. Another way to think about it is that before you pay your bills, before you buy your groceries, even before you pay your rent, you have already made your minimum deposit into your savings accounts as a completely non-negotiable expense. You can add more later as part of your variable spending and discretionary spending, but you know you are always starting with a baseline to grow from.
This is one of the core pieces of your savings plan. Every time you consider a new expense, you should be able to automatically visualize how it will impact your ability to save before it impacts your ability to spend more discretionary income.
Charity and Donations
Giving to charity is also an important part of your spending plan, but how much you can give (and where you give it) can vary wildly between two otherwise identical people. You should consider giving to charity in the same category as investments. This means that you might not be able to make it as part of your fixed spending every month (at least not at first), but it is important to identify charitable organizations you want to support and keep them as part of your overall spending strategy.
If you don’t make charity donations as part of your spending plan, even a small amount, it is much less likely that you will give at all. Take some time to investigate charitable organizations in your area, and add small amounts to your fixed spending to support. You can also add other amounts to your variable spending seasonally.
It can be tricky to factor large purchases, like saving for college, a wedding, or a car, into your spending plan. The key is to decide well ahead of time how much you want to spend, and build that amount into your savings strategy.
For example, according to costofwedding.com, the average cost of a wedding in the United States is $26,444. If you get engaged to your future spouse and both save equally for one year, you will each need to save about $110 per month (although the same source says that most couples spend less than $10,000, which will be a much easier target to reach!).
[rich]On average, students save over $16,000 if they go to a 2-year community college and finishing their last 2 years at a university, instead of doing all 4 years at the university![/rich]You will not always be able to save up ahead of time for your purchases. If you want to get a 4-year bachelor’s degree at a public 4-year school, on average you will need to spend $75,800, and you will likely need to take out student loans. To find more information about the cost of going to a college or university in your state, visit the College Affordability and Transparency Center.
Once you take out that loan, you will need to factor in your spending plan on how to pay it back. Don’t forget to plan both your spending AND your strategy to pay it back – the faster that you can repay, the less you’ll be paying in interest!
Sample Spending Plan
|Car Payment **
|Health Insurance ***
*Assumes $1,600 monthly rent split between two people. Utilities are also halved ** Car payment assumes a $7,800 used car purchased at a 7% interest rate with a 48 month term loan. For more details, see the Car Loan Calculator. *** Health insurance is based on a 23 year old in 2014 in the United States at the national average. See HealthPocket.com for reference. **** A $200 monthly savings for a 23 year old is enough to save a million dollars by age 69, earning an 8% annual rate of return. For more details, see the Millionaire Calculator. Click Here to download this sample as a spreadsheet and update with your own spending habits
Outside Factors That Influence Your Spending Plan
There are a lot of factors that can cause your spending plan to change. Some things can be huge, but some might be so minor that you might not even notice.
Marketing is what influences you to buy what products. The commercials you see on TV, the advertisements you see on the internet, and even product packaging are all working to sway you between buying or not buying, and which brand (and what price) you pay.
This is not a bad thing – you might not be aware you wanted something until it was marketed to you, but you should always be aware when you are spending exactly what marketing is at work to make sure you are making an informed decision. Before you make a decision to buy something, make sure you ask yourself why you want it – does it serve some particular purpose? Is there another product that can do something similar? If there is an alternative, have you seriously considered it or did you make your decision before looking?
If you find yourself choosing one product over another without doing a serious comparison of the benefits and drawbacks, you are probably making your choice more based on marketing than your true preferences. Since you make hundreds of consumer choices every week (from choosing which brand to buy at the grocery store to which gas station you use to fill your tank), it will not be possible to have a serious evaluation of each choice, but be aware that if you think one product is better than another just on “gut instinct”, it is likely marketing at work.
Life Changes[rich]Studies show that married couples spend less on food than single people, since they are more likely to cook meals themselves than order take-out and ready-made meals! Living with a partner can be cheaper than just living with a roommate. [/rich]
What you will notice is how your life changes can impact your spending plan. When you are dating, you will need to allocate more spending towards going on dates, buying gifts, and making sure you are always dressed to impress. If you have children, it will probably be the biggest factor in your spending plan for the next 10 years!
This is one reason to always take time to regularly re-visit your spending plan and make adjustments. As your life circumstances change and evolve, always take a close look at your fixed spending, and see which parts of your variable spending plan is growing or shrinking according to your previous estimates.
Sticking To Your Spending Plan
One reason that spending plans have started to become more popular than full budgets is that they are easier to stick to, and easier to adjust as needed. In our example before, our “burrito spending” would have needed to be added to our budget and carefully planned out, whereas we can just count it as part of our discretionary spending.
Using Automatic Payments[rich]If you try to blindly “save for a rainy day” without a financial goal, you do not have the same incentive to keep a close watch on your savings plan. If you consistently set, and reach, small goals, you have a much better chance of building wealth! [/rich]These days you can likely set up all of your fixed spending as automatic payments from your checking account – including your core savings. For the “Budget Challenged”, this can be a major improvement, but it also has a major downside.
When all your bills are being paid with automatic payments, you still need to make sure you have your spending plan in place so you know how much money is going where, and when. For example, a person without a spending plan might not remember which payments for a month have been made and which are still coming up. This means when they just check their bank balance and see $1,000, it is not possible to know how much of that is available to start spending and how much they need to save because their rent payment will be processed next week.
Spending Plans and Wealth
If you want to start building real wealth, your spending plan is the first thing you need, and part of your core strategy at every step. You will need to keep referring back to your spending plan as you plan out your financial future, and the careful balance you make between your spending and savings is the key to building up wealth over time.
Over time, you can also try to build up ways to differentiate between “Spending” and “Non-Spending” choices, and determine how your personal balance affects your overall spending plan.
Spending and Non-Spending Alternatives
There are many ways you can convert time and money, and how you balance these will have a serious impact on your income and spending. Always keep in mind that most spending decisions you make will impact this balance – how much you value your time plays a huge role in how your spending plan is shaped.
Imagine you want to eat spaghetti with tomato sauce. There are many choices you can make to get that delicious pasta and sauce which will tip the balance in one way or the other between lowering the time it takes and lowering the spending it needs.
- Do you just go to a restaurant and order it? This is the quickest, but most expensive.
- Total time cost – 10 minutes to get to the restaurant
- Total spending – $10
- Added bonus – Professionally-prepared food is tasty!
- You can also buy it as a frozen dinner. This is less expensive than a restaurant, but takes more time.
- Total time cost – 10 minutes to get to the corner shop, another 5 minutes to heat the food and clean your dishes after (15 minutes total)
- Total spending – $7
- How about buying dried pasta and a jar of sauce?
- Total time cost – 10 minutes to the store, 15 to cook, 10 more to clean up (35 minutes total)
- Total spending – $4 on sauce, $2 on pasta ($6 total)
- Added bonus – You probably get 3 meals out of this, so your per-meal cost is $2, and you can make 2 more meals later for only 5 minutes each (but that doesn’t help you now)
- What if you make your own sauce?
- Total time cost – 10 minutes to the store, 3 hours to simmer a delicious sauce, 10 more to clean up (3 hours and 20 minutes)
- Total spending – $2 on tomatoes (you already have some spices at home), $2 on pasta ($4 total)
- Added bonus – You probably get 4 meals out of this (since you get a lot more sauce when you make it than from a jar), so your per-meal cost is $1, and you can make 3 more meals later for only 5 minutes each (but that doesn’t help you now)
- Added bonus – Home-made food can be tastier than restaurants!
Each of these alternatives has a different balance of time, spending, and extra bonuses. These same balances apply to many spending choices too. Do you want to wash all of your dishes by hand, or buy a dishwasher? Would you rather repair your shoes with epoxy or buy new ones if the sole starts to break? Do you want to buy wood and build a bookshelf, or buy one from a furniture store? Each decision has a different factor of spending, time, and added bonuses to consider.
If you’re looking for ways to optimize your out-of-pocket healthcare spending, consider opening a Health Savings Account (HSA). HSAs are tax-free ways to put aside money for future medical expenses. You can learn about our Lively HSA review or learn about the best HSA accounts.