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  • Evan Werckenthien

Creating a Spending Plan (Budget)

Updated: Aug 4

Budgeting. Did you just groan?  If you did, you are not alone, as many people would upon hearing the word budgeting–Let’s face it–for most Americans, the word budget does not have a positive connotation.


This is very unfortunate because creating a budget–or “spending plan” as I like to say instead of budget– is extremely important.  Spending plans should be positive and empowering to create control of your financial life.  Spending plans should help to lower stress and help make better financial decisions.  Some positive outcomes of having a spending plan are:

  1. Ensuring your spending habits are in line with your values and goals

  2. Keeping you from spending money you do not have

  3. Empowering you to gain control over your money

  4. Preparing you for future purchases (home, cars, vacations)

Creating a spending plan should be a pillar of your financial base.  Whether every penny is accounted for or a general percentage is sufficient, tracking monthly spending is important.

Many clients want to know what a model or perfect spending plan looks like.  In truth, every budget may look a little different than the next depending on life circumstances and values.  For example, a millennial living and working downtown will have a very different spending plan from a retiree with no mortgage.  The sticking point is all that categories add up to 100% of take-home pay.


Below is a good template for creating a spending plan.  However, here are some points of clarification: all numbers are based on take-home pay (net or after taxes have been taken out) and retirement savings and health insurance are assumed to be taken out of your paycheck prior to the direct deposit.  If retirement savings or health insurance are not taken out prior to receiving a paycheck, the numbers below need to be adjusted.  If student loans or other debt payments are in the picture, they should be paid first before the below percentages are calculated.

  1. 25% Housing: Mortgage payments or rent should not exceed 25% of the spending plan. For most individuals, this is the largest expenditure.

  2. 10% Utilities and Phone: This includes all utilities for a house or apartment and cell phone costs.

  3. 15% Transportation: This includes car payments, gas, insurance, vehicle maintenance, and any other expenses.

  4. 10% Groceries: This includes groceries and toiletries.

  5. 10% Entertainment: This is considered fun money. Entertainment expenses can include but are not limited to: dining out, attending a concert, etc…

  6. 5% Clothing: For some, this could mean substantially cutting down on shopping.   If you are wearing a 5 year old pair of shoes, this 5% allocation may increase your clothing shopping.

  7. 3% Gifts / Holidays: Birthdays, weddings, baby showers, graduation parties, and holidays all require purchasing gifts.  Christmas can be devastating for a budget if it is not planned for properly.  If 3% of salary is saved monthly, when Christmas time comes, there should be an ample amount of money to cover the gifts.

  8. 12% Miscellaneous: This is where budgets get personalized. This 12% can be used to cushion other categories or create new categories: gym memberships, pets, subscriptions, child care, college savings, vacations, etc…

  9. 10% Savings: It is important to be saving money monthly for emergency funds and other future expenses. For more information see previous post: “Savings vs. Investing”.

The numbers above are just a starting point. They should be tweaked to fit your specific situation.  If you walk to work and do not have a car, then some or all of the 15% car budget has just been freed up.  That 15% can be used in a different category.


There are no unexpected costs, just unplanned costs.  Every car needs new tires eventually.  By putting a certain amount of money towards car maintenance monthly, we are preparing for when the day comes and we find ourselves at Tire Barn with a $500+ bill.  A spending plan will help individuals to be better prepared future expenses.


Spending plans can take many forms.  Everything from a complex spreadsheet to a classic #2 pencil and paper can get the job done.  Just with any other aspect of financial planning, it is never too late to create a spending plan and percentages may change over time.

There are a number of tools that can help with spending plans and keep track of spending.  Feel free to reach out for more information or with questions.

Evan@EWwealth.com

Work: 317-587-0858

Cell: 317-627-2529


Disclosure:

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. E.W. Wealth Management and Cambridge are not affiliated. The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to the sender to inform them of this fact. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling 317-587-0858. This email service may not be monitored every day, or after normal business hours. Cambridge does not provide tax advice.

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Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA / SIPC . Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. E.W. Wealth Management and Cambridge are not affiliated.

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