Why You May Need a Spending Plan Instead of a Budget

Where does the money go every month? It’s a question we hear a lot from our readers in all age groups. Young adults are trying to plan out spending for new weddings, new homes, and family additions. Mid-life adults and retirees are focused on raising kids, paying for college, and retirement.

And these issues are just a sampling of the kinds of expenses in our lives every day. A budget helps when managing savings, income, and expenses. To get some tips on a budget you can stick to, we reached out to Bonnie Sewell, CFP® of American Capital Planning. Here’s what she had to say:

Q: Why is a budget important?

Ms. Sewell: It may be semantics, but we call these “spending plans.” That’s because everybody gets to make choices as to what they care most about funding, how much, and when. It’s important because it will mirror your personal priorities when faced with a spending decision.

Q: What tips do you have for sticking to a budget?

Ms. Sewell: This usually includes two tasks, namely knowing yourself (versus kidding yourself) and having “no penalty” conversations if you share spending decisions with another person (spouse, partner, etc.). Try not to beat yourself up if you fail the first few tries. Keep trying until it sticks. If it never seems to stick, there’s a good chance your budget doesn’t really reflect you and may, in fact, reflect only what you think it “should” reflect. Until it really reflects your personal priorities, it will be a very uphill battle. When spending plans reflect our personal priorities, it can still be a mind shift, but it is generally a positive one that we have actively chosen, so there is some excitement and momentum in the change.

Q: When planning a budget, what are some things to keep in mind?

Ms. Sewell: Think “law of gravity” as in something that will not be defied. It’s the same when it comes to spending. Spending equals income minus debt (Spending = Income – Debt). In other words, no matter how you slice it, it’s always a juggling of increasing income or reducing expenses. Just like weight loss, we can talk about it a thousand ways, but in the end, we are either moving more or eating less or some combination of both.

It’s the same with spending. We can add drama, attach deities to money, blame parents, blame “the system,” etc., but it always comes back to earning more or spending less or some combination of both.

Q: Are financial goals important when planning a budget?

Ms. Sewell: Yes. I can say a financial goal is to go see Europe next year, but at the moment, my spending leaves no amount to save for this goal. My chances of reaching my stated goal are slim.

By contrast, if I have this same goal and determine that I would like to trade my current cable and happy hour costs to save for this goal, I am in control of that decision and have a high likelihood of reaching it. Goals can direct your thinking (consciously or unconsciously) and actions.

Related: Successfully Setting Monetary Goals

Q: What is something most people forget about when planning a budget?

Ms. Sewell: Give yourself permission to fund what you care about most. When we work with folks on their spending, we do not judge the spending. We do ask them to articulate their goals. What do you want? When do you want it? How much are you willing to spend on this goal? And then we compare that to where they are spending today. They get to choose to continue spending on other things or rearrange their spending to reach their stated goals.

People also forget that whatever you care most about funding is valid for you. Try not to be swayed by constant marketing to make you think you should want one thing or another. What is true for you?

• The Dark Side of Financial Goal Setting
• Are Impulse Buys Sabotaging Your Budget?
• How Macroeconomics Can Help You Reach Your Financial Goals
• Create a Spending Plan for Frugal Living

Reviewed August 2020

About the Author

Bonnie is the CEO of American Capital Planning LLC, a boutique wealth management firm with nationally recognized expertise in divorce financial planning. She has worked with families as a Certified Financial Planner since 1992.