Budget or Spending Plan? Here's the Ultimate Guide

A spending plan sounds so much more appealing than a budget - but both have their merits, as we explain.

Would you like to pay your bills every month, put money aside for savings and have some left over to spend on whatever you want? A spending plan might work better than a budget – and a single credit card or debit card could make it easier to achieve your goals.

What’s the difference between a budget and a spending plan?

Both a budget and a spending plan can help you decide how to spend your money rather than worry about where it went. They’re both designed to help you clear any debts, save for the things that are important to you and have money left over to spend as you please. The one big difference – and this might surprise you – is how they make you feel.

For many people the word ‘budget’ conjures up images of a rigid set of rules that are hard to stick to. It might even cause people to give up before they start, because writing down every dollar you spend is both stressful and time-consuming. It’s the financial equivalent of a ‘diet’.

On the other hand, a plan for spending sounds a lot more positive and achievable. Better still, the aim of a spending plan is to take the worry out of managing your money. And spending plans also tend to look at the bigger picture – so once you’ve set one up, you should feel less pressured and more in control.

There’s also another way feelings come into the equation: When you’re clear about what you’d really like to accomplish and feel confident it’s achievable, you should find it much easier to stay motivated and stick to your plan.

Gaining control of your spending, savings and debt

A budget and a spending plan starts in the same place – where you’ve been spending your money. That means looking at your bank accounts and debit or credit card statements and making a note of all your costs. You can then divide these into fixed and variable expenses.

Fixed expenses are those that come around regularly and generally stay roughly the same, such as rent or mortgage, power and phone. You should also include the minimum repayments on any car loans, personal loans or credit cards, though your overall goal will be to clear them quicker by paying a bit extra.

Most of these payments will be monthly or quarterly, though some, such as car registration, are less frequent. Others, such as car repairs and medical bills, only crop up from time to time. It’s a good idea to look back over a year to make sure you’ve covered off as many of these as you can.

This is also a good opportunity to look out for and cancel any subscriptions or memberships you’ve either forgotten about or no longer need.

Variable expenses are also regular but, here, you have a bit more control. For example, you can decide within reason how much to spend on food, or you might be able to get a train to work rather than drive in and pay for parking. You’ll know what can be scaled back and what can’t.

The idea isn’t to account for every dollar but to get as accurate a picture as possible of your average monthly outgoings.

Monthly income – monthly expenses = guilt-free spending and saving

Once you have a clear picture of your expenses, it’s time to add up your disposable income – how much you receive every month after tax and other deductions.

This will be quite simple if you have one job, are paid monthly and your employer takes care of all your deductions for you. It’ll take a bit more thought if you have more than one job or are freelance, working on a contract, or self-employed, as your income could be harder to predict.

If your income is irregular it’s safest to work with your lowest monthly estimate, so you feel confident you have your bases covered. In the well-paid months your first priority should be putting money aside as a cash reserve in a separate, interest-earning account. A bit different from an emergency fund for unexpected expenses, a cash reserve is more about smoothing out your income so you can cover your costs if a client is slow to pay or you have a quiet month.

Once you have a figure for your income you can subtract your fixed and variable expenses. The money you have left over is discretionary spending – yours to spend on anything you want without feeling guilty. This is also the money you can use to move forward in your life by paying off any debts and saving for the future. You may well find that paying off debts at the expense of buying things becomes addictive, because of the sense of wellbeing it starts to give you.

Nothing left over for spending or saving? Don’t panic!

If you find you’re not earning enough to cover your average monthly costs your spending plan can help you turn this around. You’ve already taken the most important step by getting all the facts in front of you and, cheesy as it sounds, you really should congratulate yourself on getting this far.

The next step is to list your outgoings in order, starting with the most important.

For example, falling behind on your mortgage or rent could leave you homeless, so it’s vital you pay this first.

Failing to pay utility bills on time or missing repayments on a car loan, personal loan or credit card can cost you money in fees and penalties. You could also end up with a black mark on your credit history, so these come next.

Then take a close look at your everyday and discretionary expenses for any opportunities to save. Some people get a surprise when they see how much they’ve been spending on things that aren’t necessary. If that’s true for you, curbing your spending could be much easier than you thought.

If you’ve already cut back as much as possible you could consider ways of increasing your income – for instance, by getting a flatmate or taking on a second job. Sharing your home for a while or putting in a few hours of extra work each week could be all it takes to put you back on track for financial security.

A single credit card makes it easy

The final step is to stick to your brand new spending plan. And the good news is that it’s easy to pay your bills automatically and check up on your spending any time you want.

One effective way to stay in control is to use a single credit card or debit card for every purchase you make. This way, you can also set up automatic payments so you never forget to pay a bill on time, as well as an automatic transfer to move money into a savings account. Thanks to mobile payments like tap-and-go, you don’t even need cash for small items like coffee or snacks. The only provision if you’re using a credit card is that you absolutely must clear your balance every month so you’re reducing any debt, not adding to it.

When you have a record of all your spending in one place, it’s easy to see how you’re going from month to month and make any adjustments you need. It’s also easy to keep track of your discretionary spending so you know whether you need to go carefully until your next pay or you can afford to splash out on a treat.

Start your spending plan today and we guarantee you’ll feel better about life very quickly.