You don’t have to be a financial planner to know that one of the key ingredients of financial security is having a spending plan, but most people get tripped up on this because they feel like they need to track every penny, which quickly gets tedious unless you really love doing it. Remember that the purpose of a spending plan is threefold:
To ensure you are not spending more than you make.
To figure out how much you can actually afford to save.
If you are spending more than you make or you’d like to save more, then it helps to figure out where you might be able to cut back.
Beyond that, I personally don't see a lot of value in tracking spending and actually find that the pressure to do so can lead to many people ending up worse off because they feel like they SHOULD be doing it, but they're not. That sends them to a shame spiral of overspending that could be avoided if they didn't feel like failures for not doing something that's not necessary as a hard and fast rule.
So if you're generally someone who feels responsible about money, here's your permission to NOT track your spending just for the sake of tracking.
Beyond that, knowing about how much you spend on a monthly basis is necessary to set some systems up that will allow you to stick to savings plans, avoid debt and ideally live a life where you feel like you can buy the things you want to buy, when you want them, without having to worry too much. That's where a spending plan comes in.
Finding a way to stick to your spending plan
Putting together a spending plan is one thing. Sticking to it is another - this is where a lot of people think tracking spending helps, but it mostly just leads to frustration, regret, self-flagellation and sometimes even fights in the case of partners who review past spending and don't see eye to eye on what happened to their money.
The putting together of a spending plan is relatively simple - there are lots of tools out there that can tell you where your money went, but rather than using those tools on an ongoing basis to look in the review mirror, I prefer to use them as a point-in-time look at my past spending so I can decide if I want to keep spending with that pattern or if I need to make some shifts.
It's when spending shifts are needed that the trouble comes in - we make these grand plans that require us to look at our spending daily and then assume we'll be able to adjust future spending in line. This is where most people give up.
So let’s talk about that part, assuming you already know how much you need to spend each month on bills and other recurring expenses versus flexible and often discretionary expenses like food, clothing, self-care and transportation. (If you need help on that first step, Mint.com can help with that)
First, let's stop obsessing over categories
Confession: I can’t tell you exactly how much I spent on dining out or ordering in last month. And I can’t tell you how much I plan to spend on it this month. That’s because that number isn’t as important to me as first making sure I’m covering all my other financial goals first.
What I can tell you is how much I’m saving toward several small but important financial priorities so that whatever is left over is what I can spend on things I can go without such as sushi night, shopping, spa services or Target. (Yes, Target is a discretionary expense for me and don’t tell me you also haven’t discovered their magnetic carts that just attract things.)
By prioritizing the things I know I need to make happen financially, I essentially back into what I can spend on flexible stuff (often just called "wants") without any tracking beyond setting up an alert to tell me if my account dips below $100.
Make it automatic
Once I've backed into how much money I have available to spend on whatever each month, I automate the system for the money I want to make sure is available for other things such as emergencies, pet expenses, vacations, etc. For me this means I have automatic transfers set to happen each pay day to a variety of different accounts.
Using a bank that allows me to open multiple savings accounts, I have one for each financial priority.
My spending money is at a “bricks and mortar” bank in a checking account, then I have a separate checking account just for bills that are set up on auto-pay - I fund my bill pay account with the amount needed to pay my bills each month directly from my paycheck (see below for more on this).
Here are some other accounts that you might set up:
Monthly bills
Separating your known monthly bills into a separate account and then setting them on auto-pay might just revolutionize your relationship to money. This account is for things that have due dates and relatively set amounts like rent/mortgage, internet, cell phone, Netflix, gym membership, etc. You may need to estimate for things like electric and gas that change each month based on usage - I simply use the highest amount from the past year, which ensures I’m well-funded.
I basically add up all my monthly bills, divide by 2 since I'm paid twice a month, then have that amount direct deposited to my bill-pay checking account.
What isn’t this account for? Things you can pick and choose how much and when to spend each month like groceries, personal care, and even your dog walker. Yes, this is money you need to spend, but it doesn’t have a due date or a set amount, which defeats the purpose of automating. This should be a fixed amount that would only fluctuate if you made a drastic change like moving, canceling cable, etc.
One side effect of this account: I sometimes work with people who have late bill payments all the time because they are afraid that they’ll need the money for something else. This account alleviates that fear — it’s specifically what the money is set aside for, so not only can this account avoid future late fees, but it could boost your credit score!
Emergency fund
Getting this account funded with 3 months of expenses was my top priority so before I even opened another account, I was saving as much as I could into this account. Now it’s just there, accruing interest. I can’t over-emphasize the peace of mind this gives me.
What isn’t this account for? Things I forgot to include in my “oh crap” account like expenses to stand up in a wedding, Christmas gifts for family or a plane ticket for a funeral. Those are all important things, but they are not an emergency.
Car stuff
This account is for all things car-related such as insurance, new tires, repairs, registration, etc. If you have a car payment, you can also use this account to continue paying your monthly payment once it's paid off, which can help you buy your next car with cash.
What isn’t this account for? Gas money — that’s discretionary and comes out of my spending account.
Pet medical
Pet insurance may or may not be worth it, depending on the type of pet you have, their likelihood of issues and what the insurance covers. If you find that it's not worth it, consider paying yourself the premium you're forgoing so that if/when an expensive injury or illness pops up, you have some money saved. (it’s worth noting that most pets’ major expenses come when they’re older, so if you do this throughout their life, you should have a sizable chunk built up by the time you need blood work and x-rays to figure out what old age ailment they have)
What isn’t this account for? Pet food (spending account), pet-sitting (spending or vacation account), routine visits unless you’re accounting for that with the amount you’re setting aside into this account.
Kid activities
If you have kids then you know that their extracurricular activities can add up pretty quickly. Try annualizing the costs and transferring one-twelfth each month to ease the burden of sign-up and gear up season.
What isn’t this account for? Clothing, toys, everyday family expenses — try to isolate the “extra” stuff in this account, which can be a way for parents who may disagree about how much to spend on this stuff to keep tabs on it in an agreeable way.
Other ideas
Depending on what’s important to you and what you want to better manage your spending on, you may have other accounts. For example, my clients who have a side gig maintain an account where they put 20% of their income from that gig aside so they can have enough at tax time.
Another client who wishes to help family members in need but needs some self-imposed limits has a "giving" account where she puts $100 per pay to keep her in check on feeling taken advantage of by repeat-askers but still allows her to help when she wants.
It takes a little bit of work to get these accounts set up, but it’s worth it. I shared this system with a friend of mine who is a busy mom of two young children and her email to me says it all:
“I just wanted to say thank you. I’ve separated all my fixed bills through those accounts and set up a couple of savings account for shorter term larger dollar items — Christmas, home improvements, and travel. That way, we don’t have to either put off those things or feel guilty about spending money on them.
Plus, I set up accounts for the girls for them to earn money and use on toys or whatever, and the transition of seeing the numbers is easier for them, because they are still learning math and identifying the value of the paper/coin money. So, they earn it in cash, then we add it up and deposit into our bank, and I transfer the money to their accounts.”
If you’re having trouble managing spending but don't have the chops to keep an eye on it every day, why not give it a try? What will your accounts be? Customize it to your life and just make sure you’re also being deliberate with any “extra” money you find by trying this process!