Spending Plan

If you want to start building your wealth, your spending plan is the first and most important step. Make sure to refer to it often to ensure you’re balancing your spending and saving in the right way. This will help you steadily increase your wealth over time.

Definition of Spending Plan

A spending plan is a plan of what you will be spending each month. There are two parts, your fixed expenses, and your variable expenses. The fixed part is usually the same every month, while the variable part changes a lot from month to month. Below are some examples of each.

Fixed Expenses	Variable Expenses
Rent or Mortgage Payments	Groceries
Insurance Payments	Repair Bills
Car Payments	Gift Shopping
Cell Phone Bill	Gas

Once you know your monthly take-home pay, you can cover your necessary expenses and then choose how to use the rest, such as going to the movies, adding it to your investing account, or contributing it to your savings.

How is a Spending Plan Different from a Budget?

Spending plans and budgets are similar in a lot of ways. In both cases, you’re making a list of your expenses, so you know how to allocate your income. The biggest difference is that when you make a budget, you’re allocating how you will spend every dollar you earn.

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With a budget, you will allocate how much money you’ll spend on groceries or rent, and all your other expenses. If you end up going out to eat with your friends more than you expected, you could go over budget. Then, you’ll need to cut back somewhere else to make up for it.

On the other hand, a spending plan is much simpler. Start by noting down your fixed expenses that stay the same each month, then add in your other essential costs. What you’re left with is your discretionary income, which you can use for whatever you like. So, if you want to treat yourself to burritos with friends, go for it! Just remember, that you’ll have less to spend on other discretionary items as a result. You won’t have to start from scratch if you go over budget.

When constructing your spending plan, you don’t need to list out individual items. Rather, you should develop an overall outline of how much you plan to spend in each category. For instance, you may have a category for investments that shows the amount you intend to contribute to your retirement account every month. You don’t need to specify exactly how you’ll invest your money (i.e. buying 15 shares of Amazon stocks).

Spending Plan Terms

Fixed And Variable Expenses

When reviewing your spending to determine which are fixed and variable expenses, use this rule of thumb: if the cost fluctuates from month to month (e.g. groceries), it’s a variable expense; if it’s the same each month (e.g. car payments), it’s a fixed expense.

If you want to save more money, focus on reducing fixed expenses as they will have the biggest long-term impact. For instance, if you move to a new apartment and it costs $50 less per month, that difference adds up to over $600 per year!

Cutting down on variable expenses like a dentist appointment, on the other hand, will save you money in the short-term, but won’t have much of an effect on your long-term savings.

Income

When you’re building your spending plan, it’s essential that you use your take home pay as your income amount. This is your net pay, not your salary or pre-tax income, and it represents the amount deposited in your bank account.

Savings and Investments In Your Spending Plan

Including a savings and investment strategy in your spending plan is crucial.

Your savings are funds that you set aside and don’t plan to spend, and it’s best to keep them in a dedicated savings account. It’s a low-risk way to have money for emergencies.

Investments, on the other hand, will be held in an investment portfolio, and used to buy assets such as stocks and bonds. The goal is to have your money increase in value over time, which can be used for your retirement or other wealth-building purposes. Bear in mind that there are risks associated with investing, and the value of your money will be influenced by the financial markets, the business cycle and other factors.

When creating your first spending plan, begin with your savings and investments.

The most important thing to have is an Emergency Fund. This should be kept in a dedicated savings account, and eventually should cover six months of expenses in case you lose your job or are unable to work. This money should be kept as cash to ensure it’s available when you need it.

After you’ve built up your Emergency Fund, your monthly savings can be kept as cash or invested, to achieve a higher return. When putting together your spending plan, these two items should be listed separately. Your regular savings/investments should be listed as a fixed expense, indicating that you always plan to save at least this much each month. Your Emergency Fund should be added as an extra variable expense until it’s full.

Pay Yourself First – A Saving Strategy

The “Pay Yourself First” strategy is a great way to make sure you’re always saving and investing your money. Consider it a fixed expense like your rent or cellphone bill, and add it to your list of fixed expenses. Automatically depositing a fixed amount every month from your checking account to your savings account is one way to make sure you’re following this strategy.

You could also think of it like this: before you pay any bills, even groceries or rent, make your minimum deposit into your savings account, as an absolute must. After that, you can add more as part of your discretionary spending.

A key part of maintaining your spending plan is every time you’re considering a new expense, think of how it will affect your ability to save before it impacts your discretionary spending.

Charity and Donations

Donations to charity should also be part of your spending plan, but the amount you give and where it goes can vary a lot between people. Financial experts usually suggest including charity and donations in your fixed spending. You can set up regular donations so they’re easy to plan around and have a separate category for any seasonal variable donations, like donating food and cash to food banks around the holidays.

Sample Spending Plan

Fixed Expenses		Variable Expenses
Rent *	$800	Dentist	$200
Car Payment **	$135	Mother’s Day	$60
Groceries	$150	Investments	$100
Health Insurance ***	$260	Charity	$100
Renter’s Insurance	$15
Car Insurance	$30
Cell Phone	$60
Utilities	$60
Gas	$100
Savings ****	$200
Total Fixed	$1,810	Total Variable	$460
Total Income	$2,500
Total Spending	$2,270
Discretionary Income	$230

*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

Marketing is what influences you to buy certain products. The commercials you see on TV, the advertisements you see on the internet, and even the way products are packaged are all working to sway you to buy particular products, produced by certain brands, and sold at different prices. This is not a bad thing, you might not be aware you wanted something until it was marketed to you. However, you should always be aware when spending your money, how marketing tactics influenced you, to make sure you’re making an informed decision.

Every person is susceptible to marketing and advertisements. You’re constantly surrounded by communications that influence your purchasing decisions, and this is not necessarily a bad thing. What separates a wise spender from someone who always misses their savings goals is what they do with this information.

As a general guideline, if you’re making a spending decision and already know one option is much better than any alternatives… even though you haven’t done any research yet, then you’re likely responding to that product’s marketing

Peer Pressure

• Don’t be afraid to put off a purchase. Planning to spend money to buy something, or join in next month’s activity, is very different from saying “no”. There will be the new hot topic next time, and skipping one activity means you can get a lot more out of the next one.
• Choose your niche. Even within the same group of friends, each person has their own strengths they bring to the group. For example, you might be the one who has the best shoes, or the nicest hair. Someone else can have the coolest accessories. Or maybe you’re the one who pays for appetizers when you go out, while someone else buys popcorn at the movies. Don’t feel you need to out-do everyone.
• Be honest in your spending plan. It’s pointless to build a spending plan that has $50 a month allocated to activities with friends, or purchases you plan to show off, when you can clearly see you always spend at least $200 a month. Don’t try to plan on reducing any of your current spending by more than 10%, or you will always miss your targets.
• It’s really nice to be the friend who is good with money. If you’re just starting to take your spending plan seriously, you might feel like you’re being cheap when you start turning down opportunities you would have previously taken. But after a while, this translates to “you’re the one who is good with money”, because you never struggle to hit your goals, and don’t have money-related stresses keeping you up at night. Before you know it, your friends will be coming to you for financial advice to get that same level of Zen!

Life Changes

Over time, you’ll notice how your life changes have an impact on your spending plan. When you’re dating someone, you’ll need to allocate more money towards going on dates, buying gifts, and having clothes that make you feel good about yourself. When you start to have children, they’ll become the biggest factor in your spending plan until they go off to college.

Get in the habit of regularly reviewing your spending plan so that you can make necessary adjustments. As your life circumstances evolve and change, your expenses, both fixed and variable, will change too. Reviewing your spending plan will provide opportunities to reallocate your money where it’s needed to match your current lifestyle.

At the end of the day, being able to control your fixed expenses and keep your monthly spending low will have the biggest impact on your ability to build long-term wealth.

Sticking To Your Spending Plan

One reason that spending plans have started to become more popular than full budgets is that they’re 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 with a spending plan, we can count it as part of our discretionary spending.

If you know you’ll be eating out with friends several times a month, make sure you have enough discretionary income in your spending plan to allow for these dinners out. The key to a workable spending plan is to be honest with yourself about how you spend your money.

Using Automatic Payments

These days you can set-up all of your fixed expenses as automatic payments from your checking account, including your core savings. For people who struggle with sticking to a regular budget, this can be a major improvement, but it also has a 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 have been made, and which are still coming up. This means when they check their bank balance and see $1,000, it’s not obvious how much of that is available to spend, and how much they need to save because their rent payment will be processed next week.

Spending and Non-Spending Alternatives

There are many ways you can value your 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 could make to get that delicious pasta and sauce which will tip the balance one way or the other between lowering the time it takes vs lowering the cost.

• Option 1. Go to a restaurant and order spaghetti. This is the quickest, but most expensive.
  • Total time cost – 10 minutes to get to the restaurant, another 10-15 minutes for the service, depending on how quickly you eat.
  • Total spending – $10.00
  • Added bonus – Professionally-prepared food is tasty!
• Option 2. Buy frozen spaghetti dinner. This is less expensive than a restaurant, but takes more time.
  • Total time cost – 10 minutes to get to the store, another 5 minutes to heat the food and clean your dishes after (15 minutes total).
  • Total spending – $7.00
• Option 3. Buy dried pasta and a jar of sauce.
  • Total time cost – 10 minutes to get to the store, 15 minutes to cook, 10 more to clean up (35 minutes total).
  • Total spending – $4.00 on sauce, $2.00 on pasta ($6.00 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).
• Option 4. Make your own sauce.
  • Total time cost – 10 minutes to get to the store, 3 hours to simmer a delicious sauce, 10 minutes more to clean up (3 hours and 20 minutes).
  • Total spending – $2.00 on tomatoes (you already have some spices at home), $2.00 on pasta ($4.00 total).
  • Added bonus – You should get 4 meals out of this option (since you get a lot more sauce when you make it from scratch). Making your per-meal cost $1.00, 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?

How This Impacts Your Spending Plan

In the spaghetti example above, making the sauce yourself takes about 3 hours, but now you have 3 extra meals. If you usually go out for lunch for $8.00 per meal, you just saved an extra $24.00. If you skip going out, and make your own lunches for a full month, that adds up to an easy $150.00 (once you take out the cost of making your lunches). All for just a few hours of your time needed for the food prep.

A major strength of keeping your spending plan up to date is that it gives you a birds-eye view of where you’re spending your money now. This helps build a roadmap for non-spending alternatives you can use when you need to make up for a big purchase or improve your savings goals.

Challenge Questions

1. Suppose your friend got her first job and she wants to save for a new car. Explain how having a spending plan would help her reach that goal.
2. Why is it important that you review your spending plan regularly?
3. What are three life events that could impact your spending plan? For each event, explain how you would adjust your plan.
4. Explain the relationship between a spending plan and building wealth.

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