Investing and Saving
Why a spending plan beats budgeting
By Tyler Hahn, CFP® 23 September 2024 4 min read
You probably have many plans. From dinner with friends and saving for a downpayment on your first home to everything in between, life does not happen by accident. Life is a series of intentions and plans.
Do you have a spending plan?
Amongst all the plans you make in life, it’s good to have a spending plan. Some would suggest a spending plan is just a budget, but a budget is often viewed as restrictive whereas a spending plan is created from awareness, knowledge and intention. With a spending plan, you shift from what you can’t have towards what you can have, and that leads to financial empowerment.
Let’s first look at awareness.
Perhaps the easiest part of this exercise is knowing what you earn through your employment. Typically, your employer will deposit your net pay into your bank account at predetermined dates. This could be:
- Monthly, 12 deposits each year
- Semi-monthly, 24 deposits each year
- Bi-weekly, 26 deposits each year
For the purposes of this exercise, we want to determine a consistent monthly income. Receiving your pay on a monthly or semi-monthly basis is straightforward and consistent from month to month with the chance for a small change resulting from payroll remittances (see below for more information). However if you were to be paid bi-weekly, you would receive three payroll deposits in two of the 12 months. It would be best to consider these two additional deposits as extra money.
Extra money sounds pretty good, and you may receive a bit more throughout the year. In addition to those two additional payroll deposits mentioned above, you may also receive a bonus. While a bonus is certainly welcome, the amount and timing are often not guaranteed. As mentioned earlier, your take-home pay may also change throughout the year. This is a function of required payroll deductions and remittances (Canada Pension Plan contributions and Employment Insurance premiums) that your employer sends to the government on your behalf. Depending on how much you earn, the required deductions may cease part way through the year, which will increase the amount deposited into your account.
We’ll offer some ideas on what to do with this extra money later on. It is recommended to take into account the lowest net pay that can be relied upon month after month. This will ensure your income will not be overstated for your spending plan.
Creating your spending plan
This part of the exercise may be the most difficult. Tracking what you spend can be broken down into two areas—needs and wants. In simple terms, you need to pay rent but you want a daily latte from your local coffee shop.
So, a closer look at needs:
- Housing - mortgage, rent, condo fees, utilities
- Food - this would be actual groceries vs. dining out
- Transportation - car payment, gasoline, transit pass, maintenance, UBER/Taxi
- Savings activity - amounts set aside in addition to what you may contribute through payroll deductions
Some expenses may not occur every month. If you shop for groceries at a large warehouse store, you may buy some items less frequently than monthly. Reviewing your expenses over a period of three months will give you a better idea on a monthly average.
Examples of other expenses occurring less frequently include:
- Replacing your vehicle's tires or paying for a large maintenance expense.
- Upgrading your mobile device or paying back the buy-out portion of your current device.
- Facing an increase in insurance premium as a result of a traffic ticket.
- Getting hit with an unexpected veterinary bill.
We mentioned previously that you may earn ‘extra money’ during the year. This extra money should ideally be set aside for life’s unexpected expenses. Too often we just assume (or don’t want to face) that these expenses will come up. By acknowledging and accepting these expenses you can take comfort in knowing that when they do occur, it will not have as big of an impact.
On to the wants:
- Dining out or ordering in
- Vacations - long or short, as soon as you are no longer at home, you are likely spending more
- Entertainment - movie nights, concerts, drinks with friends, etc.
- Shopping beyond the basics - this could be new clothes, sports gear or other expenses that would be hard to classify as a need
Identifying your spending on wants versus needs may be surprising and prompt you to make some changes.
By adding the total needs and total wants, you will see how much money you are spending every three months. By dividing that amount by three you will have a fairly accurate estimate of your monthly spending. Subtracting this amount from your monthly earnings will determine if you have a surplus or a deficit.
Now, if you have money left over (surplus) at the end of each month then maybe this exercise will confirm you are on the right track. That being said, an opportunity may still exist to shift/manage some expenses towards a different goal or expense.
If the result is not positive (deficit) you may want to review your spending habits.
Some changes will be significant and some may be small. Regardless, all changes that you take on should give you a sense of empowerment and control. By feeling empowered to say, “NO” to certain expenditures it allows you to say, “YES” to more meaningful purchases or goals. Our article on loud budgeting discusses this further.
There are many tools that will help you keep track of your spending. The key is to be consistent, ensuring that expenses are categorized the same way from month to month. Your banking app may have a tool that will track your spending automatically—typically through artificial intelligence (AI) which will provide you with a head start on categorizing certain expenses. If not, a good old fashioned pen and paper may do the trick. Either way, you have taken an important step in planning to spend money on your terms.
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