Creating a Monthly Spending Plan

Presented by Lucas Group Financial Advisors |

What is a monthly spending plan?

The term "budgeting" has some negative connotations, similar to "dieting." To some people, budgeting means saving every penny and eating ramen noodles. However, creating a monthly spending plan (budget) with room for eating out, entertainment, and other perks doesn't have to be a chore. Monthly spending plans can help make sure you're allocating money to the areas that mean the most to you, saving for your goals, and still providing enjoyment without the guilt of overspending.

A monthly spending plan is simply a written (or electronic) document of your income, how you're spending it each month, and how much you're saving. Spending should be divided into two categories: 

Fixed expenses are made up of the essentials.

  • Housing (mortgage/rent, utilities, upkeep) 
  • Transportation (car payment, auto insurance, gas, maintenance)
  • Basic necessities (groceries, medicines, household essentials)
  • Other fixed costs (student loan payments, health, life, and/or disability insurance, etc).

These fixed costs are relatively stable, and should not fluctuate greatly from month to month. Long-term, you can reduce these expenses in various ways such as paying down debt, shopping for different insurance, or buying a more fuel-efficient vehicle. You should also be cautious not to allow your fixed expenses to take up all of your monthly income. When you're adding a new expense, such as a car loan, it's important to examine how much you can afford on a monthly basis. 

Discretionary expenses are optional and can vary. They are much easier to adjust if needed. 

  • Dining out/takeout
  • Entertainment (movies, games, concerts, other events)
  • Travel
  • Hobbies

Discretionary spending isn't bad, but it is important to make sure that it fits within your income. With a monthly spending plan, you can give yourself permission to spend a certain amount each month, guilt-free, because you know it fits your plan. Want to buy that expensive concert ticket? Maybe it means that you reduce your spending on takeout for a week or two, but you'll know that it's alright to purchase it. Or maybe that morning coffee is really a bright start to your day, so you examine your spending and find that you can drop your cable services for a less expensive streaming membership instead. Knowing how much you can spend monthly will help you prioritize the areas that are important to you, and feel confident that you can enjoy yourself while still working towards your financial goals.

How much can I spend each month?

When determining how much you can spend on discretionary expenses, you should first determine how much is left after subtracting your fixed expenses from your monthly income. Then, you should set a savings goal for each month. These savings can help build an emergency fund, pay down debt, or invest for retirement and other long-term goals. A good goal is to generally save 10-20% of your income, but the most important thing is to start saving. Once you set your savings goal, you'll know how much you can spend on discretionary expenses each month.

Income - Fixed Expenses - Savings = Discretionary Budget


How often should you review your spending plan?

Some people document their spending every month, where others like to check on it periodically. Are you routinely meeting your savings goal, or are you overspending on discretionary expenses? If you're struggling to fit within your spending plan, it helps to track expenses regularly. You might find areas to save money or decide to prioritize some expenses over others. Tracking it regularly will also help you know how much you can afford to spend, if a large expense arises (whether an auto repair, or a travel opportunity). As hard as it is, being financially responsible does sometimes mean saying no to certain events or expenses.

If you're routinely meeting your savings goals with extra to spare, maybe it's not necessary to track your spending each month. It's still helpful to check in every so often (every 6 months or so) to review where your money is going and if your current plan still meets your goals. It's also good to review your spending whenever your income changes. When your income increases, it's common for people to start spending more as well. If you experience pay raise, you should review your savings goals and increase those proportionally, before you get used to the higher amount of discretionary spending.

Know where you stand and set future goals

You might have one or two major goals in mind, but now is the time to look at all your future objectives. Creating a long-term plan that encompasses all your goals can help set you on the best path to achieving your desired outcomes. Are you saving enough to meet both short- and long-term targets? If not, you may need to examine ways to either increase your income or decrease your spending, in order to save more each month. However, a plan that is overly aggressive relative to your resources is likely to lead to frustration, just as an overly strict diet leads many individuals to quit. It's important to balance your long-term goals with current enjoyment, and know that you're working towards your objectives without sacrificing all current luxuries.

Remember that plans change as needed

Flexibility is always an important ingredient in the planning process. As life's circumstances change, as they inevitably will, you will need to adjust your spending plan accordingly. The important point is that the process keeps you aware of these changes as they occur, and allows you to adapt to fit your needs and resources.

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Developed with adaptation from Broadridge Investor Communication Solutions, Inc. Copyright 2020.