“Create a budget” is one of the most common pieces of financial advice out there. Tracking your spending, understanding where it’s going and planning for future expenses can give you helpful insights into your financial situation. But for some, budgeting sounds restrictive, and, frankly, not very fun.
If you don’t like the idea of a budget, you can still benefit from putting some thought into your everyday financial management. But rather than using a budget, you can try using a spending plan instead.
What Is a Budget?
A budget, according to Investopedia, is simply an estimate of income and expenses. Individuals can use budgets to track their income, expenses and even savings goals. Typically, budgets can help you with both planning your spending and tracking where your money goes.
Some budgeting apps, like You Need a Budget, encourage users to report each and every transaction they make — meaning you may interact with your budget on a daily basis. In this case, budgeting is both a reactive and proactive financial habit. It’s proactive in that you’re deciding what to do with your money before you spend it. But it’s reactive in that you also track your spending — and make adjustments to your budget — as you go.
How To Create a Budget
There are endless ways to budget and endless tools you can use. But here’s a simplified method to create a basic budget:
- Tally up your monthly income.
- Record your monthly expenses. These include bills, groceries, rent, debt payments and anything else you spend on every month.
- Record your irregular expenses — things like gifts, insurance premiums or car maintenance costs that don’t occur on a monthly basis. Figure out how much you spend on these items per year, then divide that number by 12 to get your average monthly expenses.
- Determine how much of your monthly income is left after paying for these regular and irregular expenses. This leftover amount is what you have left to spend on “fun” purchases and future savings goals.
- Dream up and record your savings goals — like vacations, a down payment or a new car.
- List out all the fun ways you like to spend every month — like eating out, going to concerts, taking yoga classes or buying clothes.
- Divvy up your remaining monthly income (after your monthly and irregular expenses are taken out) between savings goals and fun spending, making adjustments until you have an allocation you’re happy with.
- Use your budget to inform your spending, then track and categorize your spending on a consistent basis. If you overspend in one category, transfer money from another to cover the discrepancy.
This approach can feel rigid, daunting and overly complicated for some. Not everyone wants such a hands-on approach to managing their money. For those people, a spending plan may be a better option.
What Is a Spending Plan?
A spending plan is similar to a budget in that it helps you manage your money, but it takes a more flexible approach. With a spending plan, you’re not necessarily planning how you’ll spend each dollar you’ll earn or tracking where every dollar goes. Instead, you’re setting yourself up with some guardrails to keep your spending in line with your big-picture goals.
A spending plan may require some upfront work with a spreadsheet or calculator, but after that, it’s pretty hands-off — which is why it appeals to so many. Plus, the term “spending plan” can feel more liberating than the word “budget.” For some, having a “plan” for their spending can help settle any feelings of spending guilt.
How To Create a Spending Plan
To create a spending plan, first look at your monthly income and determine how much you need to set aside for your non-negotiable monthly expenses. Think of these expenses as either fixed or variable costs — some are the same every month, like your rent, while others vary, like groceries. When determining how much you need for these categories, overestimate rather than underestimate. Next, add a buffer for non-monthly expenses. These are things like car maintenance and insurance premiums. This category will likely have a different cost each month, so take an average. Add the numbers for these two categories — monthly expenses and non-monthly expenses — together.
Then, set aside enough money for future you — that is, your emergency savings, education savings or retirement savings. The amount of money you set aside will depend on your income and goals, but many experts suggest saving 10% to 15% of your salary.
Once you have these targets set up, the easiest way to put your plan into action is to set up automatic transfers to fund these various categories. With money in separate savings and checking accounts for your necessary expenses and savings goals, you can safely spend the rest on “fun” spending, knowing your needs and future self are accounted for.
When To Choose a Budget vs. Spending Plan
Whether you choose to manage your money with a budget or a spending plan is up to you. People who want a tighter sense of control or who are genuinely curious about where their money is going may prefer a budget. Those who want a more hands-off approach may prefer a spending plan instead. Regardless, it’s important to find a system that works for you. When you find a tool that you like — one you’ll actually use — you’ll make progress toward your financial goals with much more ease and motivation.
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