By Dr Eugene Brink
An integral part of a budget is a spending plan.
Often times, we have very little control over how much we earn. In order for your household or personal budget to be balanced, it is incumbent upon you to reign in and restructure your spending.
Definition and utility
But what is the definition of a spending plan exactly? The University of Berkeley, California, gives the following outline: “A spending plan is a method for distributing your income among the mix of things you want and need. Creating a spending plan ahead of time will allow you to effectively manage your finances and determine where to best spend your money.”
“Just about everyone worries about their finances from time to time. Whether you’re just starting out in your first real job, dealing with child care and college expenses, or are in retirement mode, staying on top of your finances is a priority. One of the most effective ways to accomplish this is by making a monthly spending plan so you know what you are spending, where you are spending it, and whether you’re spending on things that don’t really enhance your quality of life,” says Erin Huffstetler of Thebalance.com.
Financial services company Sanlam says creating a spending plan will enable you to take control of your finances by:
- Getting out of debt and staying out of debt
- Creating a nest egg for unforeseen expenses
- Resisting the urge to spend impulsively
- Achieving goals that you have set for yourself and your family
It will also give you control and peace of mind – which is no small comfort.
Hints for creating a spending plan
According to Sanlam, creating a spending plan should contain certain apportionments and structure. Altogether 35% should go towards housing, which includes things like bond payments or rent, utilities, insurance and maintenance. Twenty-five percent should go towards “expenses”, such as food, clothing, education, medical and childcare. Travel gets 15% and includes things like car payments, fuel and maintenance. Savings gets 15% and include retirement and specific goals, such as holidays or a university education for you or your children. Ten percent should be directed to servicing debt such as loans and credit cards.
This is not a cast-in-stone strategy because some people might not have short-term debt, but it provides a sensible set of guidelines on how to spend your money. Sometimes, it is also smart to reorient your spending plan to settle outstanding high-interest debt first. In the end, the absence of such a monthly expense saves you a small fortune in interest and frees up money to be reprioritised.
One should also distinguish between fixed and flexible expenses. Fixed expenses include those that will need to appear in your monthly spending plan and won’t really change unless you move or change your plan. These expenses may include housing, insurance and car payments.
Flexible expenses, however, cover other necessities such as food and transportation, but also include any additional expenses like entertainment. These expenses allow you room to manoeuvre and decrease your expenses whereas you have little room for lowering your fixed expenses. Grasping this difference and maintaining a good balance will let you effectively manage your finances.
Also, remember to be flexible and review your spending plan. It is a “living document” that could and should change as your circumstances change.
Erin Huffstetler, 16 May 2019, “How to Stay on Top of Your Finances With a Monthly Spending Plan”, https://www.thebalance.com/how-to-develop-a-monthly-spending-plan-1389005.
Sanlam, 2019, “Don’t create a budget, create a spending plan”, https://www.sanlam.co.za/personal/financialplanning/Pages/spending-plan.aspx.
SaveAndInvest.org, 2019, “Start a spending plan”, https://www.sanlam.co.za/personal/financialplanning/Pages/spending-plan.aspx.
University of Berkeley, California, 2019, “Creating a spending plan”, https://financialaid.berkeley.edu/creating-spending-plan.