Spending Plan

If you want to start building real wealth, your spending plan is the first thing you need, and part of your core strategy at every step. You will need to keep referring back to your spending plan as you plan out your financial future, and the careful balance you make between your spending and savings is the key to building up wealth over time.

Definition of Spending Plan

A “Spending Plan” is exactly as it says – a plan of what you will be spending each month. There are usually two parts – your “fixed” spending and your “variable” spending. The fixed part is usually the same every month, with things like rent/mortgage payments, grocery bills, insurance, and car payments. The variable part changes a lot from month to month, and can include things like Christmas shopping, buying new furniture, and paying for repairs.

You can then balance what you need to spend for the month with your take-home pay, and use whatever is left over to allocate as you wish – going out to the movies, adding to your investments, or depositing in your savings account.

How is a Spending Plan different from a Budget?

Spending Plans and Budgets are similar in a lot of ways – you’re making a list of your expenses in order to allocate your income. The biggest difference is that when you make a budget, you are allocating how you are going to spend just about every dollar you earn – take a look at our Home Budget Calculator and see how many choices you need to make!

Budget Burrito
Pictured: the burrito that broke your budget

When you set a budget, you are allocating nearly all your money to specific costs or expenses (like “Groceries” and “Rent”). If you end up going out with friends a few times more than expected for burritos, you might go ‘over budget’, and know you need to cut back somewhere else to make up for it.

A Spending Plan, on the other hand, is more simple. You make your list of fixed, hard expenses that do not change from month to month, and then each month you add your other essential expenses. This means you are left with your ‘discretionary income’, or the money you can spend on whatever you like. If you want to use your discretionary income on a few extra trips for burritos, go right ahead! This only means you have less to spend on other discretionary expenses, not that you went ‘over budget’ and need to start from scratch.

Spending Plan Terms

Fixed And Variable Spending


When you are reviewing your spending and deciding whether items should be “fixed” or “variable,” you should follow this guideline:  If spending in a particular category (such as groceries) changes from month to month, this item is a variable cost.  If this item’s cost remains the same from month to month (such as your car payment), it is a fixed cost.

This also means that when you want to start controlling your spending habits to increase your savings, any spending you can cut out from your “fixed” expenses will have a bigger, long-term impact.

For example, if you decide to move into a new apartment, a $50 difference in rent will not make a huge difference in your per-month spending, but it adds up to over $600 per year. In contrast, if you skip out on a variable expense, like a dentist appointment, you might get a one-time savings, but it will have a much smaller impact on your long-term ability to save.


When you are building your spending plan, it is essential that you use your take home pay as your income amount.  (This is your net pay, not your salary or pre-tax income, and it represents the amount actually deposited in the bank.)

Savings and Investments In Your Spending Plan


Your strategy for saving and investing is an essential part of your Spending Plan.

Your Savings is money you have set aside and do not plan to spend, usually in a separate savings account. This has very low risk, and is mostly set aside in case you need cash quickly for an emergency. Investments, on the other hand, would be things like stocks and bonds – an “asset” that grows in value over time. Investments are used to build a retirement account, or simply a way to try to earn higher returns on your money (but there is always risks when investing).

When you are building your first spending plan, start with your Savings and Investments.

  • First, you need an Emergency Fund. This is money set aside, usually in a separate savings account, for emergencies. Your goal should be to eventually save up 6 months of expenses in your Emergency Fund.
  • Second, you should also plan to set aside extra money each month for regular saving and investing.

When building your spending plan, these two items should be listed separately. Your “Regular Savings/Investing” should be treated as a “Fixed Expense”, where you always plan to save at least this much each month. If your emergency fund does not yet cover 6 months of expenses, then you would need to set this aside as an extra “Variable Expense” until you have it fully-funded.

Pay Yourself First – A Saving Strategy

The idea behind “Pay Yourself First” means that you should think about your savings and investments as a necessary, fixed expense. By adding in your savings and investments to your Fixed expenses, you are reminding yourself that it is not an optional part of your personal finance strategy. This is usually accomplished by automatically depositing fixed amounts every month from your bank account into your savings or retirement account with a direct deposit.

Another way to think about it is that before you pay your bills, before you buy your groceries, even before you pay your rent, you have already made your minimum deposit into your savings accounts as a completely non-negotiable expense. You can add more later as part of your variable spending and discretionary spending, but you know you are always starting with a baseline to grow from.

This is one of the core pieces of your savings plan. Every time you consider a new expense, you should be able to automatically visualize how it will impact your ability to save before it impacts your ability to spend more discretionary income.

Charity and Donations

Giving to charity is also an important part of your spending plan, but how much you can give (and where you give it) can vary wildly between two otherwise identical people. You might not be able to make it as part of your fixed spending every month (at least not at first), but it is important to identify charitable organizations you want to support and keep them as part of your overall spending strategy.

Sample Spending Plan

Fixed Spending Variable Spending 
Rent *$800Dentist$200
Car Payment **$135Mother’s Day$60
Health Insurance ***$260Charity$100
Renter’s Insurance$15  
Car Insurance$30  
Cell Phone$60  
Savings ****$200  
Total Fixed$1,810Total Variable$460
Total Income$2,500  
Total Spending$2,270  
Discretionary Income$230  
*Assumes $1,600 monthly rent split between two people. Utilities are also halved
** Car payment assumes a $7,800 used car purchased at a 7% interest rate with a 48 month term loan. For more details, see the Car Loan Calculator.
*** Health insurance is based on a 23 year old in 2014 in the United States at the national average. See HealthPocket.com for reference.
**** A $200 monthly savings for a 23 year old is enough to save a million dollars by age 69, earning an 8% annual rate of return. For more details, see the Millionaire Calculator.
Click Here to download this sample as a spreadsheet and update with your own spending habits


Outside Factors That Influence Your Spending Plan

There are a lot of factors that can cause your spending plan to change. Some things can be huge, but some might be so minor that you might not even notice.


Marketing is what influences you to buy certain products.  The commercials you see on TV, the advertisements you see on the Internet, and even the way products are packaged are all working to sway you to buy particular products, produced by certain brands, and sold at different prices. This is not a bad thing – you might not be aware you wanted something until it was marketed to you, but you should always be aware when you are spending exactly what marketing is at work to make sure you are making an informed decision.

Life Changes


What you will notice is how your life changes can impact your spending plan. When you are dating, you will need to allocate more spending towards going on dates, buying gifts, and making sure you are always dressed to impress. If you have children, they will probably be the biggest factor in your spending plan for the next 10 years!

Get in the habit of regularly reviewing your spending plan so that you can make necessary adjustments.  As your life circumstances evolve and change, your expenses, both fixed and variable, will change. Reviewing your spending plan will provide opportunities to reallocate your money where it is needed to match your current life necessities.

Sticking To Your Spending Plan

Spending Pie

One reason that spending plans have started to become more popular than full budgets is that they are easier to stick to, and easier to adjust as needed. In our example before, our “burrito spending” would have needed to be added to our budget and carefully planned out, whereas we can just count it as part of our discretionary spending.

If you know you’ll be eating out with friends several times a month, make sure you have enough discretionary income in your spending plan to allow for these dinners out – the key to a workable spending plan is to be honest with yourself about how you spend your money.

Using Automatic Payments


These days you can likely set up all of your fixed spending as automatic payments from your checking account – including your core savings. For people who struggle with sticking to a regular budget, this can be a major improvement, but it also has a major downside.

When all your bills are being paid with automatic payments, you still need to make sure you have your spending plan in place so you know how much money is going where, and when. For example, a person without a spending plan might not remember which payments for a month have been made and which are still coming up. This means when they just check their bank balance and see $1,000, it is not possible to know how much of that is available to start spending and how much they need to save because their rent payment will be processed next week.

Spending and Non-Spending Alternatives

There are many ways you can convert time and money, and how you balance these will have a serious impact on your income and spending. Always keep in mind that most spending decisions you make will impact this balance – how much you value your time plays a huge role in how your spending plan is shaped.

Imagine you want to eat spaghetti with tomato sauce. There are many choices you can make to get that delicious pasta and sauce which will tip the balance in one way or the other between lowering the time it takes and lowering the spending it needs.

Pictured: Spaghetti
  • Do you just go to a restaurant and order it? This is the quickest, but most expensive.
    • Total time cost – 10 minutes to get to the restaurant
    • Total spending – $10
    • Added bonus – Professionally-prepared food is tasty!
  • You can also buy it as a frozen dinner. This is less expensive than a restaurant, but takes more time.
    • Total time cost – 10 minutes to get to the corner shop, another 5 minutes to heat the food and clean your dishes after (15 minutes total)
    • Total spending – $7
  • How about buying dried pasta and a jar of sauce?
    • Total time cost – 10 minutes to the store, 15 to cook, 10 more to clean up (35 minutes total)
    • Total spending – $4 on sauce, $2 on pasta ($6 total)
    • Added bonus – You probably get 3 meals out of this, so your per-meal cost is $2, and you can make 2 more meals later for only 5 minutes each (but that doesn’t help you now)
  • What if you make your own sauce?
    • Total time cost – 10 minutes to the store, 3 hours to simmer a delicious sauce, 10 more to clean up (3 hours and 20 minutes)
    • Total spending – $2 on tomatoes (you already have some spices at home), $2 on pasta ($4 total)
    • Added bonus – You probably get 4 meals out of this (since you get a lot more sauce when you make it than from a jar), so your per-meal cost is $1, and you can make 3 more meals later for only 5 minutes each (but that doesn’t help you now)
    • Added bonus – Home-made food can be tastier than restaurants!

Each of these alternatives has a different balance of time, spending, and extra bonuses. These same balances apply to many spending choices too. Do you want to wash all of your dishes by hand, or buy a dishwasher? Would you rather repair your shoes with epoxy or buy new ones if the sole starts to break? Do you want to buy wood and build a bookshelf, or buy one from a furniture store? Each decision has a different factor of spending, time, and added bonuses to consider.

Pop Quiz

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Challenge Questions

  1. Suppose your friend got her first job and she wants to save for a new car. Explain how having a spending plan would help her reach that goal.
  2. Why is it important that you review your spending plan regularly?
  3. What are three life events that could impact your spending plan? For each event, explain how YOU would adjust your plan.
  4. Explain the relationship between a spending plan and building wealth.

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