I’m going to start out by calling this thing a spending plan instead of a budget. To me, “budget” feels like “diet.” It implies that I have to do something VERY unpleasant which will be good for me in the end. In reality, a spending plan doesn’t have to feel like deprivation, lack, and an almost fanatical devotion to every cent. And it will still be good for you in the end!
“But why,” you might ask, “WHY will this be good for me”? At a very basic level, you will need to make sure you don’t spend more than you earn for any length of time…otherwise you will run out of money, rack up debt, and generally get into lots of financial trouble.
But the most common reason I hear from people who are actually doing a spending plan is that they want to be smart spenders. They want to be good stewards of their money; they want to be mindful about where they put their dollars. If you have a spending plan to steer you, it also feels very empowering. You get some great visibility into where your money goes and then you can cut the stuff you don’t need in your life and focus on what you do. Ah…that feeling of control. The best part of a spending plan is how it makes you feel.
Here are a few different ways to do a spending plan:
1. The Estimator Method: every month (or time period of your choice) you check how much money went in and how much went out. As long as you’re not spending more than you earn over the long term you are doing OK. Just make sure you are setting some aside for emergency reserve, financial independence, college for the kiddies, and any other goals. This goes for any of these methods.
An extremely simple way of doing this is to just make sure you’re not taking on any debt or tapping savings to live. If you’re not taking on debt or tapping savings, you’re not spending more than you earn.
The Estimator method doesn’t give you a lot of insight into where the money goes, but for someone who is terminally avoidant it’s a good place to start. It’s fast and easy, and you can always graduate to something else when this feels comfortable.
2. The Spreadsheet: sure, you can track everything with a spreadsheet if you like. Every month or so you enter how much you spent in each category, then make sure you’re not spending more than you earn over time. You can also set goals for each category. And don’t forget those once-a-year or occasional expenses like property tax or car maintenance.
This does give you more visibility into where the money is going, but it can be time-consuming and manual.
If you’d like a sample spreadsheet just email me. I’m happy to share mine as a starting point.
3. Online Tools/Apps: check out my Resources page for a list of online tools/apps you can use to create your spending plan. I hear that MoneyMinder is a standout because it focuses on future spend as well as what you’ve spent in the past. But any of these tools can help you automate the process so it goes faster.
If you have another tool you like to use, please comment below!
4. The Envelope Method: first you work out a target monthly spending amount by category, then you put cash in envelopes in those amounts. When you’ve spent the cash in an envelope, you’re done spending in that category for that month. If you have extra at the end of the month, you can pay down debt or save more…but don’t shift money to another category!
This method may work best in combination with a spreadsheet, online tool, or app. You would track overall spending with the spreadsheet, tool, or app and continue to pay everything you can with an automatic debit every month. The envelopes would only be used for discretionary spending or areas where you have a particularly hard time staying on your plan.
You might give Mvelopes a try here; it’s an online and app version of the envelope method.
Most importantly, please remember you may not be doing this in a vacuum. If this spending plan will involve other humans, then involve those other humans! It will need to work for everyone.
So please try one or more of these methods for a few months and see which suits you best. Comment below to let me know how it’s going.