Guide to Spending Plans

If hearing the word "budget" causes your throat to tighten up and makes it difficult for you to breathe, then you are in good company. The term "budget" often carries negative connotations in the same sense that the word "diet" does. It makes us feel like we have to give up or restrict something in order to be successful.

The word budget seems to tell us what we cannot do with our money. So we like to use a different term that encourages us to choose what we want to do with our money. We call it a spending plan. A spending plan is a plan for how you will spend your money on things that are meaningful to you.

A monthly spending plan is the foundation that your financial success is built on. It ensures your money goes toward what actually matters to you, not just what's convenient.

There is no one-size-fits-all method to spending plans that works for everybody. We will share some different methods in the next sections, but you should do some trial and error until you discover (or create) a spending plan that works for you. Feel free to mix and match your favorite ideas from the following methods.

The 50/30/20 Rule was popularized by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan.   Buy on Amazon

If you want to use the 50/30/20 rule, then you start by dividing your net income into three broad categories:

• 50% goes to needs: Examples: rent/mortgage, groceries, utilities, transportation, insurance, minimum payments toward debt, and child care.
• 30% goes to wants: Examples: restaurants, hobbies, vacations, gym memberships, streaming services, sporting events, concerts, subscriptions, non-essential clothing, hair care, and pedicures.
• 20% goes to savings, investments and/or extra debt payments: Examples: emergency fund, extra payments toward debt (to accelerate your debt payoff), retirement investments, and saving for a home or a car.

How To Do It

1. Calculate your monthly net income.
2. Multiply that number by 0.50, 0.30, and 0.20 to get the dollar targets for each category.
3. Total up the amount for your needs. If this amount exceeds 50% of your income, then you will need to adjust the percentages for your situation (i.e. the needs category may need to be larger than 50%).
4. Set aside 30% for wants and spend this money however you would like. When your money runs out for wants, then you are done spending on non-essentials for the month.
5. Transfer 20% to savings, investments, and/or extra debt payments at the start of the month. Consider setting up automatic transfers so this happens automatically for you.
6. Review at the end of the month to see how close you came to each target and make any necessary adjustments for the next month.

Pros

• Simple: No complicated calculations or detailed tracking required.
• Promotes saving: Savings targets are built into the structure.
• Balanced: Acknowledges that spending on enjoyable things is normal, which can make it easier to stick to.
• Flexible: You can adjust the percentages in each category to fit your financial situation and goals. In fact, many financial experts suggest that a 50/30/20 split might not apply to most people due to the rising cost of living and other factors.

Cons

• May not work in high cost-of-living areas: Keeping necessities under 50% of income can be unrealistic in expensive areas.
• The percentages are not universal: The right split depends on income, location, goals, and life stage.
• Needs vs. wants can be blurry: A cell phone plan, for example, is arguably both.
• Doesn't account for irregular income: If your income varies from month to month (e.g. freelancers or self-employed individuals), it may be difficult to get the percentages right each month.

Sometimes called "reverse spending plans," this method flips the typical order that people use when managing their money. For example, instead of saving the money that is left over after expenses (which is usually nothing), you save first and spend what remains.

You may have heard the advice to "pay yourself first" but have also wondered what that really means or how to do that. This is how. Transferring money toward your goals before you spend money on anything else encourages you to work with what you have left over. This can also help you be more at ease with your spending because you know that you are taking care of the things that matter most to you.

How To Do It

1. Determine how much you want to save each month. Common starting points are 10–20% of your monthly net income, but any amount is better than nothing. If you are unsure, start with something small and increase it over time.
2. Open a dedicated savings or investment account, if you do not already have one. Ideally, this account should be separate from your everyday checking account so the money is less tempting to touch. A high-yield savings account works well for an emergency fund; a brokerage or retirement account (like a Roth IRA) works for long-term goals.
3. Set up an automatic transfer to move that amount on payday. Most banks and brokerage firms let you schedule recurring transfers tied to a specific date. If your employer supports it, you can also split your direct deposit to send part of each paycheck straight to savings.
4. You can set up some general categories for light category tracking, but that is not required. As long as you monitor your spending so you don't spend beyond your monthly net income, then you should be fine.
5. Pay for your remaining expenses with what you have left over. If you find yourself running short before the next payday, reduce the savings or investment transfer slightly or look for ways to cut back on your spending.

Note that this method does not explicitly outline what you should do with the money that remains after you have transferred money to savings or investments (or debt payments). Some people pair this method with traditional category tracking while others simply refuse to track spending at all and give themselves permission to spend the rest guilt-free, which is more like a method that is called "The Anti-Budget" (or "The Anti-Spending Plan").

Pros

• Simple and low-maintenance: Once an automated transfer to a savings or investment account is set up, little ongoing effort is required (when compared to other methods like Zero-Based Spending Plans).
• Saving actually happens: Putting money aside before you can spend it removes the temptation to spend it first.
• Reduces spending guilt: Once the savings goal is funded, you can spend the rest without feeling like you are taking away from necessary savings or investment goals.
• Builds financial security over time: Consistent automated saving builds an emergency fund and/or retirement investments without detailed tracking.
• Flexible: If you need to pay off your high-interest debt before you start saving or investing, you can set up automatic debt payments instead of transferring money into savings or investments.

Cons

• Can leave you short: If you save too aggressively, there may not be enough left for essential expenses.
• May not address spending habits: If you don't track categories, then you may not notice problematic spending habits.
• Difficult when money is tight: If your amount of money for needs and wants is already close to your income, then there may not be enough margin to pay yourself first.
• May not be ideal when carrying high-interest debt: If you decide to prioritize saving or investing over paying off high-interest debt, you could end up paying more in interest than you earn in savings or investments.

The Anti-Spending Plan is closely related to the Pay Yourself First method, but it is more permissive in how you spend the rest of your money after saving and it is more hands-off in terms of category tracking. The goal is to make saving automatic and then spend the rest freely, with no category tracking, no spreadsheets, and no guilt.

How To Do It

1. Choose a savings rate. 20% of monthly net income is a common starting point, but any percentage you can sustain works. The key is picking a number and sticking to it.
2. Set up automatic transfers to send that percentage to savings or investment accounts on payday. If your employer allows split direct deposit, then you may want to use that option so the money never touches your checking account.
3. Make sure fixed expenses (e.g. rent or mortgage, utilities, loan payments, insurance premiums) are also set to autopay from what remains. (The goal is to automate as much as possible so the system runs with minimal oversight.)
4. Spend the remaining money however you want. Groceries, entertainment, shopping, etc. No tracking, no categories, no guilt. When your money is gone, you stop spending until next payday.

That is the entire system. If you find yourself running out of money before the next payday, either reduce the savings transfer or look for ways to cut back on expenses.

A setup tip: Using separate accounts for different purposes makes this much easier. For example, you could transfer money intended for:

• An emergency fund to a high-yield savings account.
• Retirement investments to a retirement account.
• All other spending to a checking account.

Pros

• Eliminates spending plan fatigue: Skipping category tracking reduces the maintenance burden that causes many people to abandon spending plans entirely.
• Savings are still prioritized: Automating contributions means saving happens even without active effort.
• Spending feels guilt-free: Once savings are funded, you can spend the remainder without second-guessing every purchase.
• Low maintenance: The system largely runs itself once automated transfers are in place.

Cons

• Can hide spending problems: Without any tracking, it is easy to miss patterns of overspending that are quietly draining your remaining money. This can be especially problematic if you are trying to pay off debt.
• Requires enough income margin: If the amount of your expenses is already close to the amount of your income, then there may not be enough room to save first and still cover your bills comfortably.
• Variable income makes it tricky: If you have variable income, a low-income month can mess up your savings goals or leave you with too little for bills.
• Less control than Pay Yourself First: The deliberate lack of structure means you have fewer options to adjust if something goes wrong mid-month.

Every dollar of income is assigned somewhere in your plan (e.g. spending, saving, debt repayment) so that your net income minus all planned allocations equals zero. You give every dollar a purpose so nothing is left unaccounted for.

How To Do It

1. Add up your expected net income for the month from all sources.
2. List every expense category that applies to you. See Spending Plan Categories for ideas.
3. Assign a dollar amount to each category. Start with fixed expenses, then move to variable spending categories, and finally savings and debt repayment goals.
4. Add up all your allocations. If the total amount that you have allocated to all categories is less than your net income, then assign the leftover amount to one of your categories (e.g. savings, debt, home or auto maintenance). If the allocated amount is more than your net income, then reduce amounts in some categories until your net income minus the total allocations equals zero.
5. During the month, track every purchase and record it against the appropriate category. Many people use a spreadsheet or an app that is built specifically for Zero-Based Spending Plans.
6. At the start of the next month, start over from step 1. You may need to adjust categories based on what was actually spent in the previous month.

Pros

• Forces intentional spending: You decide in advance what every dollar is for, eliminating mindless spending.
• Reduces surprise expenses: By breaking irregular expenses (e.g. quarterly car insurance payments, holiday gifts) into monthly savings goals, you can plan for upcoming expenses.
• Adaptable: If you overspend in one category, you can cover it by reducing the amount in another category without breaking the whole spending plan.
• Helps you prioritize financial goals: By requiring you to assign money to savings and debt payoffs up front, you can ensure that you are making progress on your financial goals.

Cons

• Time-intensive: Requires careful planning each month and consistent check-ins throughout the month.
• Challenging with irregular income: If income or expenses vary significantly month to month, rebuilding the spending plan from scratch can be burdensome.
• Can feel too rigid for some lifestyles: It forces you to make decisions about every dollar, which can feel restrictive.

Instead of asking, "How do I divide up my money?", values-based spending plans ask, "What do I actually care about?" You identify your personal values (e.g. family, health, travel, financial independence, education, experiences) and build a spending plan that reflects those priorities. Spending that is aligned with your values stays; spending that is not gets cut.

How To Do It

1. Write down your top three to five values. These should be the things that genuinely matter most to you in life, not what you think you should value. Take your time here. Some common examples include: financial security, family, health and fitness, travel, learning, experiences, giving, creativity.
2. Pull up three to six months of bank and credit card statements. Go through every transaction and label it with the value it serves or note that it does not align with any of your values.
3. Look at the patterns. Where is money going that does not connect to anything you care about? These are candidates for cutting or reducing. Where are you underspending relative to something you care about deeply? These are candidates for more.
4. Build a spending plan based on those findings. Don't worry about specific percentages. Instead, create a loose allocation that puts more money toward your stated priorities and less toward spending that was just habit.
5. When a purchase comes up, run it through a quick filter: Does this align with what I value? It does not have to be a rule, just a prompt to pause before spending mindlessly.
6. Revisit your values once or twice a year. Life changes, priorities shift, and your spending plan should shift with them.

Note that not all of your expenses will align with your values. There are some expenses that simply have to be paid regardless of how well they align with your values.

Pros

• Increases satisfaction: When spending reflects what you genuinely care about, you feel less guilty about money spent and more satisfied with where it goes.
• Reveals misaligned spending: This process exposes poor spending that has persisted out of habit rather than intention (i.e. spending money on things that you do not actually value).
• Reduces impulse spending: Running purchases through a values filter naturally cuts down on unplanned or unnecessary spending.
• Evolves with you: Because the spending plan is built on values rather than fixed percentages, it adapts as your priorities change over time.

Cons

• Can encourage spending more, not less: If your values include travel or experiences, the method can justify larger expenditures and slow down debt payoff or savings goals.
• Can cause conflict in relationships: If partners have different values or priorities, the planning process can reveal disagreements about where money should go.
• Less helpful when fixed expenses dominate: If most income already goes to rent, debt, and other fixed expenses, there may not be much discretionary spending left to align with values.
• Can be time consuming: Requires honest self-reflection. Identifying your true values (rather than what you think you should value) takes time and thought.

Cash is divided into physical envelopes, one per spending category. When an envelope is empty, spending in that category stops for the month. Using physical cash in envelopes helps to control overspending in categories where you are most likely to overspend.

This method can be used in combination with any of the other methods mentioned in this guide, but can also be used on its own. Some spending plan apps might offer virtual envelopes that allow you to track spending without physically handling cash.

How To Do It

1. Identify your spending categories and the amounts for each category. You can make each category as broad or specific as you would like.
2. Label your envelopes with the name of each category. You can use plain envelopes, binder pouches, or other containers that would work for your lifestyle.
3. Stuff your envelopes with cash. On payday, go to the bank or ATM, withdraw the total across all your envelope categories, and divide the cash into the envelopes.
4. Spend from the money in your envelopes. Use cash instead of cards to make purchases in those categories.
5. Monitor your remaining cash throughout the month. If you are running low in one envelope, then you may need to slow your spending in that category for the rest of the month. If you desperately need more in one category, you can move cash from another envelope, but that means less for that category. When an envelope is empty, spending in that category stops until next month.
6. Make adjustments and repeat next month. At the beginning of the next month, determine which categories need more or less cash, and adjust your plan for that month accordingly. Any leftover money can go into savings to be used for things like emergency funds or for planned irregular expenses (e.g. car insurance, holidays).

Pros

• Makes overspending nearly impossible: The physical constraint enforces the limit automatically.
• Makes spending feel real: Handing over cash creates a stronger emotional connection to spending than swiping a card, which curbs impulse purchases.
• Visual and tangible: Seeing how much cash remains gives an immediate picture of where you stand.
• No overdraft risk: You cannot accidentally overdraw an account when spending cash.
• Adaptable: Instead of using this method for you entire spending plan, you can use it only for the categories where you typically overspend.

Cons

• Carrying cash is a security risk: If your wallet is lost or stolen, the cash is gone with no recourse.
• Cash earns no interest: Money sitting in envelopes does not grow the way it would in a high-yield savings account.
• Incompatible with online shopping: Most online purchases require a card.
• You miss out on credit card rewards: If you use credit cards responsibly, the envelope method means forgoing cash back and travel points.
• Requires trips to the bank: Withdrawing and organizing cash at the start of each month adds time and friction.