S Stands for Spend
SIMPLE Personal Finance Series
The S in SIMPLE Finances stands for “Spend,” but it has nothing to do with how much or how little money you spend or where you spend it. “Spend” refers to spending wisely, spending on your priorities first, spending within the limits of your goals, and spending less than what your paycheck provides.
Use a Budget to Dictate How You Spend
This type of spending involves your spending plan (aka a personal and household budget) and your spending behaviors within that plan. Most American adults have a negative reaction to the word, “budget.” They feel a budget equates to restrictions and to limitations that prohibit anything enjoyable in life.
Calling a budget by the term, “spending plan,” recognizes that we must spend money regularly and that we should spend according to our own priorities (or plan). A budget is not the enemy. Impulse spending is.
Since everyone has a different money personality and different feelings about how money should be (or not be) spent, consider the following three types of spending plans. Each has its own strengths and weaknesses. One type is bound to fit your personality.
We also provide each spending plan as a downloadable file in either a Microsoft Excel format for automated totals or as a printable PDF for you to use.
The Traditional Budget Planner
Generation after generation has passed down the traditional budget so that if schools, scout troops, and financial counselors teach budgeting at all, they teach the traditional budget. The traditional spending plan asks you to do the following:
List your income after taxes
Categorize and list your expenses with their projected amounts for the month
Subtotal both your income and your expenses
Subtract your expenses from your income
If the result is a negative number, you will need to find a way to earn additional income during the month, cut out some spending, or do a combination of both.
If the result is a positive number, you should decide if you are going to place more money into your savings funds, send larger debt payments, or do a combination of both.
There is a reason 60% of American households do not budget. It can seem too complicated, overwhelmingly tedious, time-consuming, or just plain confusing. Not surprisingly, a similar number of American households admit to living paycheck-to-paycheck. This is not a coincidence.
Still, a traditional budget is better than no budget. The one thing most spending plans fail to do, though, is to include a line at the top for you to note your personal and household financial goals. If you were to go through all of the steps of the traditional budget and not tie the entire process to a good reason (goal), then your efforts very quickly feel pointless. You will quit within a month or two.
Tip: Write out one, two or three short-term goals that are important to you. Make them small (no more than two months of your monthly income) and immediate (within the next 12 months). Otherwise, they will not provide you with any motivation to persevere. Some examples of motivational goals might be:
A weekend getaway in September after the kids are back in school
A new outfit for the new job
A trampoline for the back yard by Memorial Day
Once you have added a goal to your budget, you have just changed it from a math exercise into a plan to get you something you want.
The Traditional Budget offers you great insight into your expected spending each month.
The Traditional Budget gives you just one number (the final monthly balance) that you need to understand.
You can create a Traditional Budget on a variety media, from an electronic spreadsheet to a piece of paper or even an envelope.
The Traditional Budget cannot tell you whether your expenses align with your income. If your rent or mortgage is due on the first but your paycheck does not arrive until the fifth, this type of budget will not tell you there is going to be a problem with your account balance.
The Traditional Budget takes a lot of time to prepare, especially when categorizing potential expenses.
The Refrigerator Budget
The Refrigerator Budget consists of a single sheet (either a piece of paper or an electronic spreadsheet) that you fill out and can post somewhere that you will see it (hence the name, “Refrigerator Budget”).
Draw 31 lines across a sheet of paper (or 28 or 30, depending upon the month) and number them from 1 to 31.
For each day, write a brief description of any money coming in or going out (e.g. payday or rent).
To the right of the daily description, list the amount of money you plan to spend or expect to receive.
Add income and subtract expenses from the previous day’s balance in order to project how much money you will have on that day.
The Refrigerator Budget can tell you the exact amount of money you can expect on any given day of the month.
If the Refrigerator Budget projects that your account balance is going to be negative on a certain date, you can adjust your spending accordingly.
If you do your Refrigerator Budget on a piece of paper with pen or pencil, it will take a lot of work to do all the math.
If you need to add another expense, you will need to redo the math all the way down the balance column on the right, unless you are using an electronic spreadsheet.
The Money Pie Budget
The Money Pie is a variation of the 50-30-20 budget. Whereas the 50-30-20 budget recommends that you live (i.e. pay regular bills) on 50% of your net income, spend 30% of your net income on wants, and 20% on needs, the Money Pie budget adds a bit more flavor.
The great thing about the Money Pie Budget is that you can use it every time you receive income. Anytime money comes your way (paycheck, gift, tax refund, assistance, inheritance, etc.), run it through the Money Pie budget. Here are the details:
10% Give (donations, gifts, charity, tithing)
50% Live (housing, groceries, clothing, transportation, phone and Internet)
10% Prepare (emergency savings; saving for replacement of furniture, appliances, vehicle; vacations and travel)
10% Plan (retirement planning, college savings, preparing for down payment on a home)
10% Improve (use this money to make more money: education and training, start a business, go through continuing education, etc. Debt repayment acceleration may also go here)
10% Enjoy (make sure that you have some fun money and that you use it for fun, or the rest of the budget will fall apart)
While forcing you to keep your expenses within reasonable ranges, the Money Pie budget also allows you to spend on entertainment and recreation without feeling guilty.
Simplicity makes the Money Pie Budget a great choice, especially for those who get a new job, move to a new city or apartment, head off to college, or otherwise encounter major financial changes.
The universality of the Money Pie Budget means that you can use it for all forms of income, not just a paycheck. You can use it with tax refunds. You can use it with inheritances. You can use it for cash gifts. Even teens and young adults can easily modify it to create a perfect budget for their circumstances.
The Money Pie Budget does not allow for expense tracking.
This budget does not provide you with details about where you are spending your money.
The Money Pie Budget does not indicate if or when you are likely to overspend during the month
In addition to creating and using spending plans, you will likewise benefit from developing effective spending behaviors. Consider the following resources and tools:
Determine what your spending personality is by taking our fun and insightful 30-question assessment and learning what your strengths and challenges are.
Use a Goals Card
To combat impulse spending, find a business card-sized piece of paper, write down some important short-term financial goals (vacation, activities, new-to-you car, etc.) and place that card in the same spot as your cash, your debit card, your credit card, your checks, or your pre-paid card. Every time you reach for your method of payment, you will have to reach over your Goals Card, reminding you of what you have already identified as most important in your financial life. Limit the size of your goals to about the same amount as one or two of your monthly paychecks.
Consider the Envelope System
For individuals and households that struggle to stay within their budget (regardless of the form) due to overspending on credit, debit or pre-paid cards, the envelope system will likely be a powerful tool to get you back on track. Find instructions on converting to the envelope system (click here) as well as downloads to help you set up your system.
Take the Money Transformation Challenge
Find inspiration, guidance and practical pointers for getting your personal and household finances on our Money Fit Transformation page. Besides spending plan help, you will find steps on creating goals, getting out of debt, researching appropriate insurance coverage, and planning your savings.
Budget Like a Pro
Budgeting like a Pro offers great information on the “how to’s” of budgeting. It busts some budgeting myths and provides great insight into the idea of creating a “back up budget,” a plan you will need should you ever lose your regular income.