8 Effective Strategies to Build Your Spending Plan

When it comes to creating a spending plan, it’s not one-size-fits-all. Rather, it is a personalized journey toward financial stability and achieving your goals. Since people and their perspectives vary, many different methodologies provide adaptable strategies for effective money management. What works for one person may not meet the preferences and individual goals of another. Therefore, you need to understand your outlook and choose the one best suited to your personality.

Although some have become more popular than others, here are 8 of the most common strategies to build a personal spending plan.

8 Effective Strategies to Build Your Spending Plan

1. The 50/30/20 Rule

The 50/30/20 rule is a straightforward guideline for personal spending that helps allocate your income into three broad categories: needs, wants, and savings/investments. It’s a rule of thumb designed to provide a simple framework for managing your finances. Here’s how it breaks down:

1. 50% for Needs: Allocate 50% of your after-tax income to cover essential expenses or needs. This includes things like rent or mortgage payments, utilities, groceries, transportation, insurance, minimum debt payments, and other essential bills.
2. 30% for Wants: Reserve 30% of your income for discretionary spending or wants. These are non-essential expenses that contribute to your lifestyle enjoyment, such as dining out, entertainment, hobbies, travel, shopping for non-essential items, etc.
3. 20% for Savings/Investments: Dedicate 20% of your income to savings, debt repayment beyond the minimum required, and investments for your future financial goals. This category could include contributions to an emergency fund, retirement savings, paying off debt, or investing.

The rule provides a balanced approach by ensuring that essential needs are met, allowing for some flexibility in discretionary spending. Yet, it still prioritizes savings and investments for financial security and future growth.

However, it’s essential to note that this rule might need adjustments based on individual circumstances. For instance, in high-cost areas, the percentage allocated to needs might exceed 50%, leaving less for wants and savings. It’s a flexible guideline that you can adapt to suit your specific financial situation and goals.

2. Incremental Spending Plan

An incremental spending plan is an approach that involves making adjustments to the existing plan by considering changes or increments from the previous period. Instead of starting from scratch or re-evaluating every expense, this method focuses on incremental changes or adjustments to the existing plan based on factors like inflation, changes in revenue, or anticipated changes in expenses.

Here’s how an incremental spending plan typically works:

1. Baseline: Begin with the current or previous period’s spending plan as the base or starting point.
2. Adjustments: Identify changes or increments needed for the upcoming period. These changes can stem from various factors:
   • Inflation: Account for increases in prices or inflation rates affecting expenses.
   • Fixed Costs: Address any fixed or contractual cost increases that are known in advance.
   • Changes in Revenue or Income: Consider changes in income or revenue streams that may affect the spending plan.
3. Allocate Resources: Based on these adjustments, allocate resources or funds to different departments or categories within the plan. Typically, the adjustments are incremental, meaning they are added to or deducted from the existing figures.
4. Review and Approval: The revised plan is then reviewed and approved, considering the changes and adjustments made from the previous spending plan.

Incremental spending plans are relatively simple and less time-consuming compared to some other methods. It offers stability by building on the existing structure and is often used in organizations where historical data is relied upon for planning.

However, it does have limitations. It may overlook the need for a comprehensive review of all expenses, potentially leading to inefficiencies or missed opportunities for cost-saving measures. Additionally, it might not be suitable for environments where significant changes or disruptions occur regularly, as it relies heavily on historical data and gradual adjustments rather than a thorough reassessment.

3. Zero-Based Spending Plan

Zero-based spending is a technique where all expenses must be justified for each new period, regardless of whether the expense existed in the previous period or cycle. Unlike traditional approaches, which often start with the previous period’s budget as a baseline, this one requires a fresh evaluation and justification of all expenses, starting from zero.

The process involves:

1. Identifying Activities: All activities within an organization or household are identified and analyzed.
2. Assigning Costs: Costs are then allocated to these activities.
3. Ranking Priorities: Activities are ranked according to their importance to the goals and objectives.
4. Allocation of Funding: Funds are then allocated based on the priorities identified. Higher-priority activities receive funding first, followed by lower-priority ones.

The idea behind Zero-Based Spending is to encourage a thorough review of expenses and prioritize spending based on the current needs and objectives. Although it is more frequently used in corporate finance, you can also adapt it to personal spending plans. This strategy can help in identifying inefficiencies, cutting unnecessary costs, and reallocating resources to areas that contribute more significantly to reaching your established goals.

4. Value-Based Spending Plan

Value-based spending is a financial planning approach that aligns your spending with your core values and long-term priorities. Instead of just focusing on numbers or fixed percentages for different spending categories, this method emphasizes identifying what matters most to you and allocating resources accordingly. Here’s how it generally works:

1. Identifying Core Values: Start by identifying your core values and what’s truly important to you. These could include things like family, education, health, experiences, personal development, community involvement, etc.
2. Aligning Spending with Values: Once you’ve identified your values, allocate your income in a way that reflects these priorities. Assign more funds to categories that align with your values and bring you the most fulfillment.
3. Adjusting Spending Habits: Analyze your current spending habits and make adjustments. This involves evaluating whether your current spending aligns with your identified values. For example, if health and fitness are important to you, you might allocate more funds to gym memberships, healthy food, or fitness classes.
4. Regular Evaluation and Adjustment: Continuously review and reassess your spending plan to ensure that your habits align with your values. Over time, your values or priorities might change, and your plan should adapt accordingly.

Value-based spending encourages a deeper reflection on what truly matters to you and how your spending habits reflect those values. It helps create a more intentional and fulfilling way of managing money by ensuring that your financial decisions align with your life priorities.

This approach can differ greatly from traditional methods because it’s not solely focused on numbers or specific percentages for different spending categories. Instead, it’s about the qualitative aspects of your spending and how it relates to your values and overall well-being.

5. Envelope Spending Plan

The envelope spending plan is a simple and effective method that involves allocating specific amounts of money for different spending categories and then physically or virtually separating these funds. Here’s how it typically works:

1. Identify Categories: First, you categorize your expenses (such as groceries, utilities, transportation, etc.) based on your monthly needs.
2. Allocate Funds: Assign a specific amount of money to each category based on your income. For example, if your monthly grocery budget is $400, allocate that amount to your “Groceries” envelope/category.
3. Use Envelopes or Apps: Traditionally, this method involved using physical envelopes for each category, labeled with the expense name. You would put the allocated cash for each category into its respective envelope. Nowadays, digital apps or software mimic this method, allowing you to create virtual “envelopes” within the app and allocate funds accordingly. These apps often sync with your bank accounts, making it easier to track and manage expenses.
4. Spending and Tracking: When you need to purchase in a specific category, you take the money from the corresponding envelope (or allocate the expense in the app). This practice helps in visualizing how much money is left for each category.
5. Adjust as Needed: If you overspend in one category, you might need to take money from another envelope or readjust your plan for the following month.

The envelope spending plan is beneficial because it imposes a clear limit on spending in each category, promoting better control over expenses. It also offers a visual representation of where your money is going, making it easier to identify areas where you might need to cut back or reallocate funds.

6. The Pay Yourself First Method

The “pay yourself first” method is a straightforward and effective way to prioritize savings and investments by making them the priority when managing your finances. It involves setting aside a portion of your income for savings or investing before allocating money to other expenses. Here’s how it works:

1. Automatic Savings: When you receive your income, whether it’s a paycheck or any other form of payment, immediately allocate a predetermined percentage or fixed amount to savings or investment accounts.
2. Priority on Savings: Treat your savings as a non-negotiable expense, just like paying bills. By prioritizing savings before considering other expenses, you ensure that you’re consistently building your savings or investment portfolio.
3. Setting Goals: Determine your financial goals—whether it’s building an emergency fund, saving for a specific purchase, or investing for long-term growth. Allocate a portion of your income towards these goals every payday.
4. Planning with What’s Left: After you’ve set aside money for savings, allocate the remaining income to cover your necessary expenses like bills, groceries, rent, and discretionary spending.
5. Consistency is Key: The “pay yourself first” approach emphasizes consistency in saving or investing. By making it a habit to set aside money for your financial goals before anything else, you ensure progress towards your objectives.

This method works well because it prioritizes long-term financial security and goals, ensuring that you don’t neglect or overlook savings and investments in favor of immediate expenses. It fosters a disciplined approach to money management and encourages regular contributions towards achieving financial milestones.

Automating this process, such as setting up automatic transfers to your savings or investment accounts, can make it even easier to stick to this method and build a solid financial foundation.

7. Bi-weekly or Weekly Spending Plan

A bi-weekly or weekly spending plan involves structuring your framework around shorter periods—either on a weekly or bi-weekly (every two weeks) basis—rather than the typical monthly approach. Here’s how it works:

1. Income Frequency: With a bi-weekly or weekly spending plan, you’re aligning your plan with when you receive your income. Instead of creating a plan for an entire month, you’re designing it for shorter periods based on your payday.
2. Expenses and Allocation: Divide your expenses into smaller increments that match your income schedule. Categorize your regular expenses such as rent or mortgage, utilities, groceries, transportation, and discretionary spending on a weekly or bi-weekly basis.
3. Income Allocation: Allocate a portion of your income to cover these categorized expenses for each period. For example, if you’re paid bi-weekly, allocate half of your monthly rent/mortgage, utilities, and other monthly bills to each paycheck.
4. Flexibility and Adjustments: Weekly or bi-weekly spending plans allow for more frequent adjustments. If you overspend in a particular week, you can quickly adjust the following week to compensate.
5. Smaller Scale Planning: Planning in smaller increments may make it easier to manage your money, especially if you have irregular income or find it challenging to plan for an entire month at once.

This method provides a more granular view of your finances and helps in managing cash flow more effectively. This is especially helpful if your income arrives in smaller, more frequent intervals. It can also make it easier to track and adjust spending habits since you’re reviewing your spending more frequently.

However, it might require a bit more effort to manage due to the need for more frequent planning and adjustments. Additionally, you must adequately cover monthly expenses that might not align perfectly with your weekly or bi-weekly income schedule.

8. Behavioral Spending Plan

Behavioral spending plans integrate psychological and behavioral principles to better align financial planning with individual tendencies, habits, and motivations. It acknowledges that personal behaviors, attitudes, and emotions greatly influence financial decisions. Here’s how it works:

1. Understanding Behavioral Patterns: It starts by recognizing your financial habits, triggers, and tendencies. This includes understanding spending patterns, emotional triggers that lead to impulse purchases, and any biases that impact financial decisions.
2. Setting Behavioral Goals: Instead of just focusing on numbers, this method emphasizes setting behavioral goals alongside financial goals. For example, aiming to reduce impulsive spending or sticking to a specific strategy that aligns with your behaviors.
3. Implementing Strategies: Behavioral planning employs various strategies to align behavior with financial goals:
   • Visual Cues and Reminders: Using visual aids, reminders, or apps to keep track of spending or savings goals. This makes them more tangible and reinforces positive behaviors.
   • Automation: Setting up automatic transfers for savings or investments to overcome the temptation to spend.
   • Rewards and Incentives: Creating incentives or rewards for meeting financial milestones to reinforce positive financial behavior.
4. Adapting to Behavioral Changes: Recognizing that behaviors and circumstances change over time. It involves regularly reassessing strategies and making adjustments to ensure they align with current behaviors and goals.
5. Addressing Psychological Biases: It considers cognitive biases (like loss aversion or present bias). Then, aim to mitigate their impact on financial decision-making.

This approach acknowledges that traditional methods might not suit everyone due to individual differences in behavior and psychology. By incorporating behavioral insights into the process, it aims to create a more personalized and effective financial plan that considers individual tendencies and motivations.

Overall, behavioral spending plans seek to create a strategy that is not just financially sound but also realistic and sustainable based on one’s unique behaviors and habits.

Read More

• Unleashing Financial Freedom: A Guide to Creating Your Personal Spending Plan
• Student Finances: Why You Should Have A Spending Plan
• Striking a Balance Between Over-Spending and Over-Budgeting