Sometimes the way we talk about a topic makes all the difference. Recently I’ve heard a couple people refer to a ‘spending plan’ as an alternative to what we normally call budgeting. The word budget has a lot of baggage so framing it in a different way could potentially have benefits for how we think about it. While budgeting is a valid concept that can have a great impact for some people, it’s viewed in a negative way that can limit the different ways we can apply it. Everyone has a spending plan, whether they’re being intentional about it or not, so making positive adjustments to the current spending plan is easier than implementing a strict budget from scratch. This simple change in framing, combined with some unique cash flow management techniques has the potential to benefit many more people than traditional budgeting ever could.
Strict Budgeting Struggles
There are two huge hurdles to get over with traditional budgeting. The first is how to get started because it’s a significant task if you’ve never done it before. You’ll need to decide on a budgeting method, break down how much you want to spend in each separate category and figure out a system to keep track of everything over time. Unless there is extreme pressure to get this done, most people don’t even get this far. While the initial budget implementation is difficult, the second challenge is even harder: sticking to it over time. In this way budgeting can be similar to dieting because it can be possible to do it initially, but over time it’s difficult if you haven’t truly changed fundamental habits or created a system that’s sustainable for you. Knowing these struggles, what are some options to create a personal spending plan that’s easier to implement, and also follow through on over time?
The 50 – 30 – 20 Plan
I mentioned the 50 – 30 – 20 budget in a prior post about considerations to think about before implementing a new budget (3 Things to do Before Budgeting). I think this fits well with the idea of a spending plan because it’s easier to implement and more flexible in allowing different priorities to shift around. The basics of it are that you allocate 50% to needs, 30% to wants and 20% to savings. The needs encompass the larger, more fixed expenses that you can’t go without like housing, transportation, groceries, utilities, etc. The wants are things that can easily be cut down if needed, such as restaurants, vacations and other entertainment. Finally, the savings bucket would contain any debt payments in addition to other savings. This may not be the perfect endpoint to land on, but it’s a great start to work on improving different aspects of an overall financial picture. It also makes it easier to put context around different decisions that might be made. For instance, if you’re looking at a house that will bump up your spending on needs from 50% to 65%, where is that extra 15% going to come from? Is it smart to cut savings back to almost nothing, or are you willing to stop taking any vacations to be able to afford the house? There are limitless ways to look at this, but in the end it comes down to how these three major buckets shift around and align with our priorities.
Adjusting to Personal Situation
While the 50 – 30 – 20 model is easy to remember, it’s probably a little too simplistic, and serves as more of a starting point for most people. For example, if you don’t feel you need to spend 50% on the necessities, then don’t! It’s important with this plan to be mindful that it isn’t leading to lifestyle inflation. If your income is going up, your needs and wants don’t need to rise at the same rate, so take advantage of the opportunity to save a little more. Some changes can be easier to make than others if you’re farther along the path. It’s usually easy to cut some unnecessary spending from the wants category, but if you already have a house or car that puts the needs category higher, it could mean a total lifestyle change to get back on track. There are many paths from point A to B, so it’s important to customize a plan to fit your personal goals. If you’re at a point where you want to get your saving on track, or have some goals around financial independence, then maybe it makes sense to boost the savings bucket to 35%. You could do it immediately by reducing other lifestyle expenses, or over time by allocating any future income raises to savings instead of increased spending. Do you have a spending plan? If you need help thinking about your current cash flow, schedule a complimentary meeting to talk through questions you have.