What is a Spending Plan

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Spending plans are an alternative form of budgeting. Where your budget accounts for all of your spending down to the minutia a spending plan is a little more flexible. When you setup a budget your goal is to assign a dollar value to each of the categories until you reach a zero dollar amount. This means you need to plan out your income in addition to your expenses so you can arrive at that magical zero number.

Budgeting is great, but it does have its flaws. The biggest flaw is the difficulty in keeping within these tightly configured spending goals. When you say you will spend $10 for bubble gum, you can’t spend $10.50 without realigning your budget. This isn’t to say that spending that extra .50 was bad, but since you are now .50 over budget you are going to have to pick it up somewhere else. This means you are going to have to realign your budget.

Another pitfall of traditional budgeting is the hourly worker or other non salaried individual.  If I tried to do a budget for next month off of my income from blogging this month I wouldn’t have a clue where to start because there is no guaranteed consistency in the income stream. Situations like this are prime targets for implementing a spending plan.

An Overview

In the simplest terms a spending plan is just breaking up your income into broad categories and then assigning each of these categories a percentage of money you bring in each month. The broader categories and percentages of income make this a easier to both maintain and track for those with more fluid incomes. For instance in a budget you may have categories like Food:Dining Out and Food:Groceries, in a spending plan you would just have Food.

How to Create One

Just like a traditional budget you can’t lay out your plan until you know your spending. Once you have identified your areas you want to focus on then you can go about setting your plan in motion. The key to creating your plan is to realize that the intent is to be more flexible/fluid than a traditional budget. When you set to creating your plan take into consideration your fixed expenses first, like mortgages, car payments, insurance, and utilities. Then you can have categories for food. entertainment, and saving. You want to create a plan where 100% of your income is accounted for in percentages as opposed to dollar amounts. A typical plmay look something like this:

Housing: 25%
Utilities: 5%
Insurance: 5%
Food: 20%
Loans: 15%
Entertainment: 5%
Savings: 10%
Clothing: 10%
Other: 5%

This creates a scenario where you have accounted for 100% of whatever income you bring in and you don’t have to stress out if you spend a little bit over on dinner out with the guys because the line item is bigger than just dining out, you can still make up for it later. Spending plans are just simplified budgets, you still need discipline to achieve the benefits of your plan.

I still think I like a traditional budget over a spending plan, I love to see granular data. Do you use a spending plan or a traditional budget? What advantages do you see in one over the other?

Photo: (amagill)

{ 3 comments… read them below or add one }

1 JT @ Redeeming Riches July 14, 2009 at 11:11 am

I think it’s just easier to use dollar amounts as opposed to percentages when structuring this. You make a good point about fluctuating income.

I am self employed and trying to create a budget is nearly impossible, so what I’ve done is basically pay our family the same amount no matter if my income was higher or lower than that amount. I have a good sized cash reserve to help offset those months where income is low. This way we still have an idea of what to count on for our budgets. This seems to help.

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2 CreditLendingBlog July 17, 2009 at 5:22 pm

Good stuff. This is very helpful for people struggling with debt. Would be great to have a chart or a pyramid for the expense section.

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3 threadbndr July 24, 2009 at 3:14 pm

I actually track both $ and %. It’s entirely possible to build a budget based on past spending where you would be ‘on budget’ with 50% of your take home pay being spent on food and 0.5% being saved. Not good.

My budget uses ‘sweep’ accounts and ‘balance forwards’ to allow excess from one category or time period to offset or carry forward. If I find myself needing to move more money into a category frequently, it’s time to rework the % /budgeted $.

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