There is a question that people in the fitness community frequently ask: What is the best diet and exercise program? The answer . . . the one you can stick to. I could tell you that you should eat broccoli because it’s one of the most nutritious foods on the planet, but if you gag the second it touches your tongue, or worse, if you’re allergic, that’s going to be terrible diet advice.

In the finance realm, much the same can be said about budgeting, or as we like to call it, a spending plan. The best spending plan is going to be the one you can stick to. Each person’s goals and values will differ, and because of that, their spending and savings will be unique as well.

In addition, because each person’s spending is a little different, so too are the various spending plan strategies they can implement. There are pros and cons to each, and one is not necessarily better than the other. The key is to pick a method that works best for you and stick with it. What’s even better is there are many tools and apps we can use to make creating a spending plan easier than ever.

In the following blog, we will outline three different methods for creating a spending plan, starting with the most detailed and ending with the simplest. But first, we should address why you should make one.

Why Create a Spending Plan, and How to Go About It?

There are many benefits to creating a deliberate spending plan, and we addressed some of them in one of our recent blogs . But to stick with the diet analogy, just because we know salad is better for us than pizza is doesn’t mean it’s any easier to say no to the meat lovers’ supreme.

The biggest benefit to creating a spending plan is that it helps make your spending more deliberate so that it aligns with your goals and values. If you’re spending money whimsically, it’s incredibly likely that you’re putting money toward things you don’t really value or want long term. If you don’t know where your money is going and why, you can’t make changes to better direct it toward the things you really want.

The biggest hurdle with spending plans is that they’re downright terrifying. Like dealing with a sitcom’s overly judgmental mother-in-law, actually sitting down and seeing where all our money is going can create feelings of regret, shame, and dread. Like a monster hiding under the bed, if we don’t look it can’t hurt us, right?

But the only way to defeat this monster is to muster up some courage, grab a flashlight, and shine the light on it to see what’s really there. You may be surprised — maybe there’s no monster at all. Even if there is, now you know what you’re dealing with and can take steps to handle it.

One of the best things you can do when creating a spending plan is not be judgmental with yourself. It’s scary tackling this. The goal of creating the spending plan is to gather information and make a plan for the future without resentment or self-loathing. Take small steps, and don’t bite off more than you can chew.

Like many things in life, the most difficult challenges are often the most rewarding. Creating a spending plan is one of the most challenging tasks in all of personal finance, but it can also be one of the most beneficial. There are many different ways to tackle this, and it’s important to find the way that works best for you.

Bucket or Envelope Approach

The first spending strategy we’ll discuss is the bucket or envelope approach. The concept of this strategy is simple. For all the income you take in, you assign those dollars to various buckets in advance. The purpose is to plan ahead so that when you get paid, you already know where your money is going and why because you decided on this in advance.

Example: Mary’s net pay is $4,000 a month. Her spending plan is to spend $1,500 a month on housing, $500 on groceries, $500 for her car, $500 for entertainment, $500 for savings, $250 for fitness, and $250 for miscellaneous items during the month.

The above example is just that — an example. Your bucket strategy can be as detailed or as broad as you want. For instance, instead of having one large bucket for entertainment, you could break that down further into dining, sporting events, movies, streaming services, spa services, video games, dinner parties, etc. The main focus is to create a bucket strategy that caters to how you think, and more importantly, once money is assigned to a bucket, to keep the dollars allocated to it.

The overall goal with this spending strategy is to make your spending deliberate. In order to set this up, you need to reflect on how much money you’re taking in, how much of that money needs to go to certain fixed expenses during the month (mortgage, utilities, groceries, etc.), and then allocate the rest to the remaining buckets.

The reason this strategy is commonly referred to as the envelope strategy is because that’s how it used to be done. You’d get paid, cash your check, and then allocate physical dollars to physical envelopes to determine your spending for the month. Thanks to modern technology, the antiquated cash-and-envelope system has become a bit easier with the use of a variety of apps to digitally help you allocate your dollars. Two common apps for this system are Every Dollar and Qube Money .

Pros:

• Helps make your spending more deliberate because you are assigning a “job” to every dollar in advance. Allows you to reflect on where you want your money to go and why.
• Helps you not overspend because each dollar is assigned. When you’re out, you’re out. 

Cons:

• Initially, more labor intensive and time consuming to set up. You need to really think about your spending plan.
• A little more difficult to allocate dollars with variable paychecks (those based on bonuses or commissions). Best practice is to assign dollar values to fixed expenses and percentages to other categories.
• More rigid spending than other methods, and can be discouraging when unexpected expenses come up. It’s a good idea to have a miscellaneous expense category because this will inevitably happen.

Dollar Tracking

The next recommended spending plan strategy is dollar tracking. The general idea for this plan is not to allocate dollars in advance but to simply track where you spent your money after you’ve spent it.

The overall goal of dollar tracking is to spend money and reflect on the spending afterward. By tracking where you are spending your money, you can see whether your actual spending matches your goals and values. You may be surprised at how much or how little you are spending in certain areas. You won’t know unless you track where your money is going.

Carl Richards , who is a top thought leader in the financial services industry and has his own New York Times column, has provided some sage advice about spending intentionally. Spend money, but after you do, reflect on how you feel and what your emotions are after the purchase. No judgment, no excuses, no justification — just observation. There is brilliance in its simplicity. This is a key step to help you spend more intentionally, and tracking your spending can help you get there.

A popular app to help track your spending is Mint . You link your credit and debit cards to the app, and it tracks and categorizes your purchases. From what we’ve heard, the categories don’t always match up well to the actual expenses, so it may take a little work to get those to line up correctly when you start.

Alternatively, you can simply track your spending in an Excel file. This is what I do. It takes a little more effort, but what’s great about this method is that you are forced to type in each of your expenses, allowing you to reflect on the purchase (which is the main goal of dollar tracking). Also, since you’re working with your own Excel file, you can customize it however you want and create whatever categories you want as well.

I’ve made an example copy of the Excel template I use for expense tracking in Google Sheets . When you spend any money, save the receipt and simply fill in the columns when you have some time. Since I do this in Excel, at the end of each month, I run a quick pivot table using the “amount” and “category” columns to quickly add up how much I spent in each area over the course of the month. I can then use this to see patterns in my spending and reflect on whether I’m spending my money where I want it to go. Of course, you don’t need to be as elaborate, and just beginning to track each expense is a fantastic start!

Another small benefit to this method is that it makes it easier to reconcile your credit card at the end of the month. Since you’re writing down what you spent money on, when you spent it, and which card you used, you can double-check your statement and make sure there are no fraudulent charges that may have been missed otherwise.

Pros:

• You can see where your money is going and reflect. May be less discouraging than missing spending targets in certain categories during the month with the bucket strategy.
• Less time consuming than the bucket approach, especially if you’re using a tracking app like Mint.
• Can help you reconcile credit card statements.

Cons:

• You’re not planning your spending in advance, so it’s initially not as deliberate.
• Can be tedious if you incur lots of small charges (or it may prevent you from making some if only to not have to enter it in your spreadsheet!).
• If you’re not reflecting on your spending, it may not spark the change desired.

The Anti-Budget

The word “budget” tends to be a universally loathed term. This spending strategy tends to be celebrated if only because of its name. Down with the budget! But what really tends to be most appealing about this strategy is its simplicity.

I heard this from personal finance commentator Paula Pant , who popularized the strategy. This strategy flips the script on traditional budgeting by focusing on savings rather than expenses. You create a savings target based on your goals, and as long as you’re hitting that, who cares where the rest of your expenses go? No tracking, no categorizing, no assigning “jobs” to each dollar. Just figure out how much you need to save, make sure you do that, and then let the rest of the chips fall where they may.

For those new to setting a spending plan, this may be the best place to start because it’s the easiest. That’s not to say that it doesn’t require work, however. You still need to figure out what your goals are and what you are saving toward (home, wedding, vacation, retirement, etc.). You also need to determine whether your rate of savings, along with a realistic return and risk assumption, will put you on track to meet your goal in the desired time frame. But once that is accomplished, you don’t need to worry about your day-to-day expenses as long as the savings targets are met.

Of course, like all the other strategies listed, this has its own drawbacks. By not focusing on your expenses at all, you won’t know whether your actual spending closely aligns with your values and what you say you want to spend your money on. Also, there is some complexity in determining adequate savings targets along with return and risk assumptions, which must be addressed carefully. As your goals and life change, your savings targets need to change with them.

Flipping the script to whatever isn’t saved is spent (rather than whatever isn’t spent is saved) helps create a pay-yourself-first mentality. As long as you’re saving toward your desired goals, you don’t need to sweat the other small stuff. As Paula’s website says, “You can afford anything … But not everything.” This is a great mentality for really homing in on what you want your money to do for you and focusing on saving it there.

Pros:

• Is easier to get started and requires less ongoing maintenance.
• Helps create a pay-yourself-first mentality to encourage saving.
• No judgment associated with what you’re spending your money on because you’re focusing on savings targets.

Cons:

• Spending is not deliberate, and you’re not tracking expenses. You may not notice if your other spending is aligned with your values and can be tweaked to reach your other goals faster.
• Some complexity with creating accurate savings targets by implementing accurate risk/return assumptions and time frames.
• Need to update your targets as your goals and life events change.

Lifestyle Changes

In addition to implementing a spending plan strategy, there are some general lifestyle changes that can help you make better decisions overall. Spending choices are some of the most impactful financial decisions we make. If we can make better decisions, we can improve our financial situation immensely.

Change Your Habits

Many of us don’t realize this, but the vast majority of the decisions that we make every day are automatic. We don’t think about them because they’re deeply engrained habits. Changing your habits can very well change your life. New York Times best-selling author James Clear outlines this in his book Atomic Habits .

Making small adjustments day to day can compound to make an enormous impact over time. Based on James’ work, to create better habits, you need to ask yourself four questions :

• How can I make it obvious?
• How can I make it attractive?
• How can I make it easy?
• How can I make it satisfying?

Breaking bad old spending habits and forging new, better ones, is one of the most impactful things you can do to improve your financial situation. The best part is once this is done, maintaining it becomes so much easier because it’s a habit!

Get Enough Sleep

Another author, Matthew Walker, wrote a New York Times best seller called Why We Sleep that discussed the vital importance sleep plays in our overall health. Sleep, unsurprisingly, is critical for our cognitive function. Research has shown that we become more impulsive and irrational when we don’t get adequate quality sleep. Trying to stop those impulse purchases? Maybe consistently getting some quality sleep is the antidote you need.

Avoid Decision Fatigue

Decision fatigue is the concept that our decision-making abilities diminish throughout the day. We start the day fresh, but as we face more and more overwhelming choices, our minds shut down and the quality of our decisions is impacted.

To make better decisions, sometimes it’s best to limit the number that we make in a day (at least as much as we can control). Formulating better habits can help with this. Also, more quality sleep can increase our resilience. But beyond that, planning whatever you can ahead of time helps free up your brain for other decisions. Limiting the strain of decision fatigue can help you make better spending decisions as they come up.

Summary

Formulating a spending plan can be one of the most beneficial things you can do to improve your overall financial situation. Although it is one of the most impactful, it is also one of the most overwhelming and challenging. The key is to start somewhere and be sure not to judge yourself; just genuinely reflect on your current situation.

There are many different ways to accomplish this, and you should choose the one that works best for you and your goals. We recommend trying out a few different strategies and tweaking them over time to find the one that fits your needs.

Even if you don’t stick with it long term, we highly recommend tracking your spending for at least a few months, if only so you have a better idea of where your money is currently going. One month is too short to really see any patterns, and one-off expenses can skew things. A few months though is a good baseline, even if you end up using a different strategy going forward.

In addition to utilizing a spending plan, you can also work on improving your habits, getting better sleep, and reducing the impact of decision fatigue to help you make better spending decisions.

If you need assistance with your overall financial plan, we encourage you to reach out to our team .

_{This is not to be considered tax or financial advice. Please review your personal situation with your tax and/or financial advisor. All advisors at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford, NH. Milestone work with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors .}