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We all know that we’re supposed to have a budget. Just like we know we’re supposed to eat vegetables, drink eight glasses of water a day, and get eight hours of sleep.
But we don’t.
Only 41% of Americans use a budget, even though every piece of financial advice starts with making a budget.
So if tracking your spending with a traditional budget and a lot of different spending categories isn’t working for you, let’s try something just a little bit different.
But before we get started, I’m not going to refer to this as a budget. We’re going to call it a spending plan from here on out.
Why a spending plan? We’re wired to want things that give us security and pleasure and we run from things that cause us pain. To me, a budget means restriction and pain. A spending plan means that I get to choose where my money goes. So let’s just agree that even though they’re basically the same thing, we’ll call this a spending plan.
The Spending Plan: Key Principles
To create a spending plan that works, there are a few key principles that you want to know:
1. Spend less than you earn.
There’s no way around this one. If you want to have money to enjoy things in your life, you need to spend less than you earn. The bigger the gap between what you earn and what you spend, the more money you’ll have available for the things that actually matter in your life.
To widen that gap you have two options: spending less and earning more.
The best financial plan involves both of those.
2. The hard-line: the only number that matters
It doesn’t matter how much you spend on groceries this month, whether you needed to buy new pants, or whether you celebrated your friends going away with a bottle of champagne. With a traditional budget, all of those purchases would be in different category buckets (food, clothing, entertainment). And depending on what you do that month you may be over in one category, which can make you feel a little terrible about yourself.
Forget those buckets. With a spending plan, there is only one number that matters monthly: the hard line.
The hard line is the number that you can’t spend more than each month.
Let’s say you earn $5,000 per month and you want to set aside $1,500 each month to fund your life goals. That includes $750 for retirement, $300 for travel, $75 for car insurance, $250 student loan payment, and $175 for a new camera and photography course.
Your hard line is $3,500 ($5,000 – $1,500 = $3,500). You can’t spend more than that.
You have the freedom to spend this $3,500 however you like, but just know that’s your limit.
3. Embrace a system
Day to day, I like to be very hands-off with my money. I do log in and check my balance once or twice a week, but I like having things happen on auto-pilot. For me, that makes my life so much easier.
What’s important is that I have a consistent way of doing things so that day-to-day, month-to-month, these important details are taken care of and I can spend my time and my energy focusing on things that matter more.
In level 2 of the spending plan below, I detail out how I automate everything. If automation is the system you need, implement it. If you prefer to have a manual system where you check in with your money more frequently, use that.
It may take some figuring out through trial and error, but decide what works for you and embrace that system.
The Spending Plan In Action
I like to break the spending plan into 3 levels: beginning, intermediate, and advanced.
Beginning: Calculate your hard line
Remember the hard line? The only number that actually matters? Here’s how we calculate that:
Step 1: Figure out how much you want to save
There are 4 main buckets that your saving should fall within: life goals, retirement, irregular bills, and debt.
- Life goals: This is how you use your money to live your best life. That might mean saving for a vacation, emergencies, a new home, education, a sabbatical, or a career change. These life goals can also include paying off any debt. Your life goals should reflect the vision that you have for your truly extraordinarily, great life. This isn’t the time to think small. If you don’t really know what life goals excite you, read this. Financial life planning has transformed how we look at our money and our life.
- Retirement: Someday you may want to work less. Or, you may not want to work at all. Putting away money for what you want later in life is an important part of your spending plan.
- Irregular bills: You know that random bill that comes in once or twice a year? And it always seems painful to pay? What if you saved for it monthly so that when you had to pay it, it felt effortless? Saving monthly for irregular bills like insurance and property taxes makes paying them easy.
- Debt: I consider debt to be a part of the savings equation. This is money that you’ve already spent — with credit card and student loans — that you need to pay back.
Step 2: Calculate your hard line
Remember, the hard line is the only number that matters. It’s what you earn minus what you want to save. In the example, the hard line is $3,500 ($5,000 income – savings goals of $1,500).
Step 3: Analyze your spending plan
The point of calculating how much you want to save first is to be able to clearly see tradeoffs that you may need to make with your money.
If your hard line doesn’t cover your basic living expenses, you’ll likely have to trim down one of your goals.
Again, let’s say that your monthly income is $5,000, you want to set aside $1,500 for your goals, and your hard line is $3,500.
Is that enough to live on? Your recurring monthly bills include $2,000 for rent, $400 for a car payment, $200 for basic utilities, and $150 for gas. This leaves you with $750 for the rest of the month.
Can you live on $750 a month of spending money to cover all food, shopping, meals out, and any incidental purchases during the month?
You may not think that’s realistic. Maybe you decide you’d feel more comfortable with $1,000 per month of spending money. What can you do to change that? You’ll start looking at what you said you wanted to set aside for goals and you’ll get a sense of the tradeoffs you’re making with your money.
If you want to find an extra $250 month to live on, what has to change? You either save less toward your goals or you spend less on your other expenses.
In our example, you want to save $1,500 for your savings goals: that includes $750 for retirement, $300 for travel, $75 for car insurance, $250 student loan payment, and $175 for a new camera and photography course.
To find extra spending money, you might decide that saving for a new camera and photography course isn’t worth it. Or maybe you decide that you won’t travel as much this year. You cut those savings goals to have more to freely spend each month.
But if that doesn’t feel right, what else can you change? Do you look for a cheaper place to live or get a roommate? Do you ditch the car (and car payment)? Or do you make more?
There’s no right answer here. The idea is to decide what least important to you and to get rid of it in favor of what’s most important to you.
Cutting out things that don’t matter leaves more money for the things that do.
Intermediate: Automate everything
Once you know what you want to spend and save — you’ve created your spending plan — it’s time to set it up so things happen automatically.
Why automatically? Because if you wait to transfer money yourself, you’re likely going to forget. Automating things makes it that much easier to stick to a spending plan.
We’ve set up our automatic plan to work like this:
- We get paid
- Money is automatically transferred to our savings and investment accounts (we have separate savings accounts for each goal)
- Bills are paid automatically, all toward the beginning of the month
- The money that remains in our checking account is for us to spend
This handy flowchart shows how it all breaks down:
Advanced: Intentionally spend
Jordan and I were pretty good with money once we had the first two levels set up. We knew what our hard line was and we created a system that worked for us.
The real change happened when we became more intentional with how we spent every dollar. We embraced the idea that every dollar is a choice: how we earned it and how we spent it was within our control.
If how we spend is within our control, we should try to get the maximum amount of happiness out of each dollar we spend. In economics, this is referred to as utility: how much happiness you receive from a good or a service.
What brings you more happiness? Buying a cake or buying a bag of carrots? Buying your lunch each day or buying concert tickets on the weekend? Or, in the example above, having a nice car (with a car payment) or buying a new camera and taking a photography class?
Since we can’t spend on everything, we should focus our spending on the things, services, or experiences that bring us the most joy.
If you start looking at every transaction that way, you’ll start to notice that every dollar that you spend isn’t the same. Spending on some things will bring you a lot of lasting happiness, spending on others won’t. Research tells us that spending money to buy back time will bring us more happiness than spending money to buy things. Other research links spending money on experiences and others with more joy.
In 2018 I spent $1,482 on Amazon. I can’t recall more than a few of those purchases. Yes, some of them were necessary, but not all of them. I’d estimate that 30% of those purchases were mindless and possibly things I could have done without. I didn’t get the maximum utility (or happiness) from spending that money.
But I can recall – happily – the money that we spent on a babysitter to have our first date night after our son Henry was born. I can clearly remember the money we spent to build a home gym, to help us prioritize our health when life with a newborn left us with little time to get to the gym. And I remember the money that we spent to see Death of a Salesman at our local theater on a warm summer evening.
Reflecting on how happy these purchases and experiences made me — and how unenthusiastic I am about a number of my Amazon purchases — helps me to remember that money should be spent in the best way possible. And that reflection helps shape all of my future purchases so I can continue to strive to get the most happiness out of each dollar spent.
Spending intentionally on what brings you the most joy can help you ward off over-spending and lifestyle inflation, leaving you with more money to put towards the things that really matter.
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