Today, we\’re going to talk about the best way to build out your Plan to Spend, and we\’ll start with your income. From where do you derive your income? Do you hold the standard corporate American position? Or are you a contractor? Are you self-employed? Do you own a business? Or do you have dividend or rental income?
What are the most consistent sources of income that flow into your bank account?
Consider side hustles and any other additional consistent revenue that you can include in your Plan to Spend, and realistically examine what needs to be allocated to which categories.
Next, let\’s look at expenses. Note every expense you reviewed in that bank statement or your credit card statement over the last 90 days. Break down those expenses into categories and simplify them into manageable chunks that you can monitor. You want to build your Plan to Spend based on the categories that matter most to you. Obviously, you\’re going to have the essentials like healthcare, housing, and so on, but you\’re also going to have categories that are more personalized to you.
We\’ll go through each category and the associated percentages that EveryDollar (a free, online budgeting resource) recommends. The first category they outlined was giving. Giving is one of those areas that I have at the top of my list, and I attribute the largest percentage of my budget to that.
I love giving because it is about serving others—it\’s about giving back rather than hoarding your treasures.
We have a natural tendency to focus on our own needs instead of looking up and out at the ways we can make a difference in other people\’s lives. EveryDollar attributed 10% of your take-home pay to giving. You could give this to an organization or a cause that matters to you, maybe your local church or even adopting a family to support. But I would encourage you to make this a priority in your budget no matter what season of life you\’re in.
The second category has to do with retirement savings.
Initially, that savings rate should be at 10% and, over time, up to 15%. However, I would just make savings a goal, especially if you don\’t have any rainy day fund or you don\’t have any security or safety fund beyond that in the event of a layoff or other emergency in your life. Make sure that you\’re building in a buffer, or margin, between you and what happens in your life.
The third category relates to food. This category almost mirrors saving in the sense that EveryDollar attributes 10-15% of your take-home pay directly to food. Food would include dining out, ordering Uber Eats, or going to the grocery store. Think about the money that you spend directly on nourishment and build that into your budget.
The next category has to do with household utilities, including things like gas, water, and electricity. This will be 5-10% of your take-home pay.
Next comes housing, set at 25% of your net or take-home pay. The percentage recommendations are all over the map for this category, but generally, what you\’ll find is about 30% of your gross income should be going to housing. Others stretch that number out to 37%, others more so. Think about ways that you could \”house hack\”: use some kind of arbitrage to Airbnb your property, figure out how to rent out a room, or something similar to that, so the growing housing expense doesn\’t pommel your budget. I know that this is probably the most challenging aspect within these budget categories, but I believe that there are ways to have affordable housing at this time, even in this lifecycle of the economy.
EveryDollar set the category for transportation at 10% of your take-home pay. This category includes your vehicle and everything associated with that vehicle. You probably have fuel expenses and oil changes; maybe you\’re saving up for tires or shelling out money for a car payment. Your overall transportation expense may be lower if you live in a highly-populated area where you can use mass transit or don\’t own a car and utilize a ride-sharing service like Uber. Either way, analyze your expenditures and determine all the ways in which you spend money on transportation-related items.
General health expenses are the next category and are pretty straightforward; EveryDollar recommends staying within the 5-10% range.
Beyond that lies insurance. Insurance is often one of the larger budget areas because it could include auto insurance, homeowners insurance, healthcare insurance (if you categorize it here instead of general health expenses), renters insurance, etc. But they recommend this category to be somewhere between the 10-25% range of your net take-home pay.
Now, on to something a little more exciting: recreation!
They recommend spending about 5-10% of your budget around recreational activities. You can apply this fund to your son or daughter\’s soccer team expenses, or it could be toward a family outing. Think through how you spend on recreation and whether you\’re actually planning those expenditures within your Plan to Spend.
Personal spending is the next category at 5-10%. This category could include a particular hobby that you enjoy. I love reading, for example, and so I may spend that on audiobooks or even physical books, in some cases. I encourage you to make sure that you are actually spending a certain amount of your budget on things that matter to you personally.
The final category is miscellaneous expenses:
anything from a run to Walgreens to an Amazon purchase of nit-noid things. Again, this is an estimated recommendation of 5-10% of your take-home pay.
As you examine each of these categories, consider which category (or categories) matter most to you. Find the items on which you disproportionately focus your financial resources. Think, \”I have 100% of my income to allocate. I can\’t go beyond that because then I\’m living beyond my means. But within that 100%, what percentage will I assign to what area based on the lifestyle I want to live?\” What matters most to you? What areas do you need to maximize; which ones should you minimize? If housing is a lower priority for you, you might consider getting a less expensive place to live. If traveling is a high priority, attribute more of your spending to travel than to housing. Regardless, figure out what matters most to you specifically and maximize that. Then decide what matters the least and minimize those expenses.
As I\’ve mentioned before, \”don\’t want what you don\’t want.\” Don\’t just look at your neighbors, friends, and other people around you and base your financial decisions on their priorities. I have many friends in my sphere that I don\’t align my spending with whatsoever, and that\’s okay. There are other aspects in which we share common ground, but spending isn\’t always one of them. You shouldn\’t feel pressured to match the spending habits of those around you.
Please note that the purpose behind signing up for free budgeting software (mentioned in a previous blog) is to help you to track your spending and allocate the proper amount of resources to the categories that matter most to you. I offered this as a preemptive approach before diving into our theme of debt—the consequences of debt plague so many people. There\’s so much stress around the topic, and people are legitimately losing nights of sleep over it. As always, this upcoming topic is near and dear to my heart.
I desire to help people build margin and create the ability to move beyond the chaos and into freedom.
So, here\’s my call to action: you\’ve been looking at your last three months of bank statements, and you\’ve already considered signing up for whatever free software you\’re going to utilize to track your spending. Now, you\’re contemplating the budget categories that add the most value for you. Spend some time to bring those three aspects together so that the categories you are budgeting for and the categories you are building a Plan to Spend align appropriately with the lifestyle you want to live.
