Spending Plan: How to Create a Spending Plan – The Worth Project

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You want to get better with your money. To have it go where it needs to and fund the life that you really want. And since budgets are, well, boring, you stumble upon the idea of a spending plan.

But what exactly is a spending plan? And how do you get started creating one for yourself? In this article, I’ll walk you through just that.

Spending plan vs. budget

What is the difference between a spending plan and a budget? In reality, not much. Both of these are tools to help you understand how much money is coming into your bank account and how it’s being spent. When I think of a budget, I think of restriction and deprivation (and really, just a chore that I never want to do).

My spending plan definition is that it’s a proactive way to choose where my money goes.

While there might not be a huge difference in practice, there’s a huge difference in psychology. I will sit down to proactively write out a spending plan for my money. Ask me to write out a budget? I’ll probably never get around to actually doing it. A spending plan is a fancy way to talk about a budget, and who doesn’t like to get a little fancy every now and again?

What are the benefits of a spending plan?

If you have a plan for where you want your money to go, you’re more likely to have it go there. Do you want to save for a vacation? A down payment on a house? Or a fancy camera? Creating a spending plan will help you direct money into a savings account and help you recognize that to funnel that money towards that goal, you’ll probably need to cut back on your Chipotle habit (sorry, Chipotle).

If you don’t have a plan for where your money will go, you’re more likely to end up at the end of the month having eaten a lot of Chipotle but with very little in savings towards any of your goals.

As Americans, we’re terrible at saving money and equally terrible at creating a plan for it. Only 41% of people have a budget or a spending plan, which could be one reason that so many of us fall short on our financial goals every year.

If you find yourself coming up short at the end of every month (or dipping into savings just to make ends meet), it’s time you create a spending plan.

How to create a spending plan

There are five steps to get your spending plan up and running.

Step 1: Know what’s coming in

The first step is to know exactly how much money you make each month. If you combine money with a partner, include their income as well. You’ll want to include things like:

  • Your salary
  • Side income
  • Child maintenance payments or alimony

Step 2: how much do you want to save for your goals?

What do you actually want to do with your money? Remember, this is a chance to tell your money where you want it to go, so take some time to reflect on your goals. This might include:

  • Retirement savings
  • Emergency fund savings
  • Vacation savings
  • Savings for a house down payment
  • Any other fun goals you want to include

Make sure you put down a monthly savings number next to each goal. So if you want to save for a trip to Italy, write down exactly how much you need to set aside each month to make a trip to the land of pizza and wine.

Step 3: How much do you spend on necessities?

Do you know how much you spend on things like your housing, food, and transportation each month? If you do, great! You’re ahead of the curve. If not, grab your bank account statements from the last couple of months and do some estimating. Write down how much you spend on all of your necessary purchases. This includes things like:

  • Rent or mortgage payment
  • Car or home insurance
  • Taxes
  • Groceries
  • Gas or public transportation
  • Childcare
  • Utilities

Step 4: Calculate what’s remaining (aka, your hard line)

After you put money towards your goals and pay your necessities, how much money do you have remaining for discretionary spending? This number is your hard line. It’s the remaining amount of money that you can spend doing fun things like eating out and shopping. Rather than tracking a lot of different discretionary spending categories, it’s a lot easier to just know how much you can spend and make sure you don’t go above that. Does it really matter if you’re buying a pair of jeans or dinner out? Nope. That’s why just focusing on that hard-line is so much easier.

To calculate this hard-line number, simply subtract what you’re saving and what your necessary expenses are from your monthly income.

Not thrilled with that hard-line number? That’s what step 5 is for.

Step 5: Analyze and adjust

If you’ve gone through your initial pass at a spending plan and you end up with a hard line number that is not liveable, it’s time to make adjustments where you can. Take a look back at your other spending and see what you can change.

You may find that you can cut the cable cord, find a cheaper cell phone contract, cut out your grocery budget, or negotiate your rent. This is your chance to decide exactly how you want to spend your money and decide what you’re happy to give up to reach some of your loftier financial goals.

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A spending plan example

Because things are easier to understand and more fun with an example, we’ll use a quick example from a friend, Sarah.

Sarah is ready to create a spending plan that helps her reach financial goals and stay sane in the process.

Step 1: Sarah’s income

Sarah has a W-2 job that pays her $5,000 per month after taxes. She does get an annual bonus, but since that’s not her monthly, guaranteed income she’s not going to include it in her spending plan calculation.

Step 2: Sarah’s savings goals

Sarah has some big goals that she’s ready to save for, including:

  • Retirement: $750
  • Travel: $350
  • Home down payment fund: $500
  • Student loan debt repayment: $275
  • New camera and photography course: $175

The total that she wants to save for is $2,050. That’s quite a bit of her income, but she’s ready to see if she can figure out a spending plan to make it work.

Step 3: Sarah’s necessities

Sarah earns a good amount of money, but she also lives in a high cost of living area. That means her necessities are pretty expensive. They currently include:

  • Rent: $1,500
  • Car payment: $400
  • Cell phone: $100
  • Internet + utilities: $150
  • Gas: $200
  • Groceries: $500

In total, she spends $2,850 each month on her necessities.

Step 4: Sarah’s hard line

Because she has some pretty big goals and lives in a high cost of living area, the amount that she has remaining to spend as she chooses each month isn’t a lot. With an income of $5,000, savings goals of $2,050, and necessary spending of $2,800, she’s left with $100 to spend on everything else for the remainder of the month.

Step 5: Analyze and adjust

Now Sarah can sit down and look at everything objectively and make decisions about where she spends her money. Does she think she can live off $100 spending money per month? Probably not. But, she has options!

She may decide that some of her savings goals are a little aggressive. Maybe she’ll strip $50 from her travel budget and her camera savings. Now she has $200 discretionary spending each month.

She can also look at some of her necessity costs. If she was to get rid of her car payment ($400), that would change her situation drastically. To do this she could look at selling her car and buying a cheaper, used one. She could also get creative by changing where she shops for groceries or switching to a much cheaper cell phone plan. And of course, she could look for ways to reduce her $1,500 rent payment. Is it worth it to move to a cheaper neighborhood or get a roommate?

Creating your simple spending plan

Now, it’s your turn. Set aside a little time to gather your income and expenses information. If you don’t know how much you spend on necessities, grab last month’s bank statement and start piecing things together.

I recommend doing this in two stages: steps 1-4, and separately, step 5.


Once you have all of your information together, it’s good to take a step back and consider what you want to change. For example, you might want to research cheaper cell phone carriers or monitor your grocery spending for a week to see what can change. Don’t feel pressured to make changes all at once. Give yourself the space to put real thought into what you want so you can create a spending plan that truly reflects how you want to spend your money.

Actually sticking to your spending plan

Once you’ve created your spending plan, the fun is just getting started. It’s one thing to have a pretty spending plan laid out on a piece of paper. It’s quite another to actually stick to it (if you’ve ever gone over your budget for a month (or two or three) you know this is true. After many failed spending plans and budgets, I’ve learned a thing or two about making them stick.

These articles will help you stick to your plan, so you can get the freedom to do more of what you want in life:

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