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Budgeting Basics: How to Create a Spending Plan


If you were to ask me, what’s one thing I can do to improve my financial situation today, without a doubt I would tell you to implement a budget. Despite its usefulness, not very many people actually create or use a budget though. In fact, according to a (2013) survey by Gallup, only 32% of US households utilize a budget.

Maybe that’s because budgets have a reputation. For a lot of people, budgets are restrictive and tend to be guilt inducing, much like diets. First you want me to cut out ice cream and carbs and now you want me to put my money on a diet? What the what?

Regardless of how you feel about them, budgets are important. Too important to disregard.

In recent years, the budget has begun to go by a new name: the spending plan. Budgets and spending plans are essentially the same thing, but the term spending plan sounds better and it makes it easier to see its value – create a plan for my spending? Makes sense.

Whatever you call it, implementing a plan for your money is critically important and everyone should do it. No matter what your current financial situation is, creating and following a spending plan will almost certainly improve it.

The Purpose of a Spending Plan

The purpose of a spending plan is to take control of your finances. Being in control of your finances means you’re actively managing your money instead of letting things like creditors and impulses dictate how you spend your pay each month.

Don’t make the mistake of thinking that budgeting is only for those who are “broke”. Not true. Spending plans are for everyone. It doesn’t matter how much or how little you make, a spending plan will provide insight into your current spending habits and direction for your future spending.

As we all know, if you fail to plan then you plan to fail – which is exactly why a spending plan is your key to success. It’s quite literally is a plan for how to spend your money, allowing you to set (and reach) your financial goals.

How to Create a Spending Plan

Step 1: Determine Your Priorities and Set Some Goals

Don’t skip this step! Without clearly defined goals, we lack direction. Ask yourself, what are you trying to accomplish in the short and long-term? Do you want to pay off debt? Save for a down payment on a house? Fund a vacation?

Make sure your goals are SMART – specific, measurable, achievable, relevant, and time-bound. How much money do you need to accomplish those goals? How long will it take? How will you know when you’ve accomplished your goals?

If you’re married, develop your goals together so you have a shared vision for your future.

Step 2: Track Your Income and Expenses

In order for your spending plan to be helpful it must be realistic. In order for it to be realistic, you’ve got to use real, actual income and expense numbers. That means you’ll need to spend some time tracking those numbers – 30 days at minimum. You’ll want receipts from cash transactions, credit card and bank statements, a record of where your ATM withdrawals went, and so on.

In addition to being accurate, tracking your money like this helps ensure you don’t miss any expenses like the dog food you only buy once every other month or a $10 subscription fee that you forgot all about.

Step 3: Input Your Numbers

If you want to use budgeting software or an app, that’s great. I’ve personally been using Mint for years and love it. Personal Capital is equally useful and completely free. If not, though, don’t despair. Pen and paper or an excel spreadsheet work just as well and have the added bonus of being free, simple to use, and fully customizable. What matters here is that you actually sit down and develop a spending plan. Any process by which you do that is perfectly fine.

3A. List Your Income

You’ll want to include all sources of income here, no matter how small. This will include your regular 9 to 5 job, your evenings and weekends side hustle, child support, and so on.

If your income fluctuates drastically, because of self-employment for example, it’s best to look back at several months of the fluctuating income, add each month together and then average it out. The longer the period, the more accurate your average will be.

3B. List Your Fixed Expenses

Again, you’ll want to look at actual expenses you previously incurred so you can more accurately estimate your future expenses. For fixed expenses, those numbers should be very stable from month to month making this fairly straightforward.

Example of fixed expenses you’ll want to include:

  • Housing. This will likely be one of your largest expenditure categories and will include items such as rent or mortgage payment, homeowners or renters insurance, utilities (trash, water, sewer, electricity), and property taxes.
  • Vehicle. Include any monthly loan payment, regularly scheduled maintenance, and insurance.
  • Television. Cable, Netflix, Hulu, etc.
  • Cell phone.
  • Internet.
  • Charity. If you regularly donate to charity, then this should be an area you budget for.
  • Debt Payments. Include any personal or student loans or other fixed monthly payments that you make toward debt.
  • Savings. Any fixed amount that gets regularly paid to savings – i.e. 5% towards your 401K.

3C. Estimate and List Your Variable Expenses

Variable expenses vary each month (duh) and can be harder to track and much harder to estimate. The best way to estimate them each month is to determine the yearly cost in each category and divide by 12. That takes time and dedication and assumes that you actually have records to look back upon – don’t worry if that’s not the case. Make your best guess using the figures you do have and adjust each month as you go forward.

Variable expenses could include any or all of the following, as well as others not listed:

  • Food. This includes all of your groceries, take out and delivery, restaurant meals, etc.
  • Gas.
  • Personal Care. Haircuts, manicures, massages, etc.
  • Children. Childcare, school fees, sports and athletic fees, field trip costs, birthday parties, etc.
  • Clothing. Professional wardrobe items, seasonal pieces, etc.
  • Entertainment. Entertainment can include many things, such as going to the movies, going out for drinks, concert tickets, sports, and so on.
  • Taxes. If you are self-employed, then taxes will make up a  large part of your budget.
  • Health insurance.
  • Miscellaneous. Pet expenses, fees, gifts, etc.

3D. Don’t Forget to Budget for Long-Term Expenses

It’s easy to forget to budget for things that come up irregularly or yearly. Things like the registration renewal for your car, annual trips to the vet for vaccines, Christmas gifts, or property taxes for example, since these are typically outside of what you think of as routine expenses.

It is best to budget for these long-term expenses monthly as well, rather than as they occur, so that by the time the expense is due you already have money set aside for it. You’ll want to find the actual or estimated the annual cost of these items and divide that number by 12 – that’s how much you should put aside monthly in order to pay the annual bill. Then add those amounts to your budget so they can be treated like regular expenses.

Step 4: Subtract Your Expenses From Your Income

If after subtracting your expenses from your income you’re left with a deficit, you’ll need to make adjustments. Look through your expenses, especially your variable expenses, and be honest about where you can make changes. Depending on how big your deficit is, cutting out lattes may not be enough and you may need to make some hard decisions – can you get rid of a car payment? Downsize your housing? If you’ve trimmed all you can, then start figuring out ways you can make more money.


Check out this list of 25 side hustles you can start this weekend to boost your income.


If, on the other hand, you have a surplus of money left over, congratulations! Assign that money a job. Should it be used to build your emergency fund? Placed in a high yield account for short-term savings? Transferred to your IRA for retirement? Moved to a 529 for college planning? Don’t let your savings linger – put it to work for you.

Step 5: Review and Make Changes as Needed

I strongly recommend that you review your spending plan regularly. At a minimum you should be looking at it and making tweaks as needed on a monthly basis.Your budget may need to be updated for all kinds of reasons – a job change, new expenses, or changes to your financial or lifestyle goals.

The bottom line is that your spending plan should be realistic. Be realistic about your income and your spending habits and utilize your budget to help you reach your goals.


Questions? Have advice to share? Let me know in the comments below!

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