Managing Your Money

Creating a spending plan you’ll actually stick to


For most people, having a budget – and sticking to it – can be very difficult. Expenses that only appear annually or are unexpected can derail a month’s progress, and it isn’t always easy to turn down a night out with friends. If you’re trying to create a spending plan you can actually stick to, consider a new approach.

Create a spending plan you’ll actually stick to:

Demystify your spending. Review your last few months of credit or debit card transactions. It is easy to lump your transactions into a handful of categories and finish only to find “miscellaneous” expenses represent nearly half of your monthly discretionary spending. Being as specific as possible in this step will help you later on in the process.

Tip: in this step, try to get a sense of which expenses are for convenience (versus social) to help in your analysis. For example, if your monthly ‘dining out’ cost is $200, about what percent is from grabbing a sandwich at lunch versus a dinner with friends?

Analyze the results. Before you start making any choices on your spending habits, review the data. Where are you spending the bulk of your take home pay? Do you have a lot of reoccurring fixed expenses or is it mostly variable? What percentage of your pay are you spending on housing, transportation, food, and so on?

Ascribe value. Now that you know where your money is going, it’s time to determine what matters most. Flag your top five most important expenses or things you got the most value from. For some, a weekly dinner with friends is non-negotiable; while for others, it’s a premium cable package or payment on a luxury car.

Downsize. For the frequent charges that aren’t as important, consider eliminating (or dramatically reducing) five reoccurring or common expenses. Perhaps in order to reduce your monthly tab at local eateries without sacrificing time with friends, opt to start bringing lunch and skip the Starbucks run. Is Uber your regular mode of transportation? Don’t limit yourself to only cutting out low cost expenses either. As you downsize, aim to find about 10% in savings from your overall monthly spending.

Get creative. Time with friends is important, but it doesn’t always have to cost an arm and a leg. Try mixing some free activities into your social routine. Split the cost of pizza delivery and host the crew for the game or ditch the weekly brunch spot sometimes and catch up on a hike or a walk instead.

Take a closer look at “fixed” expenses. Be careful to not dismiss fixed costs without finding out if you can reduce them further. Cable providers frequently have specials even for existing customers. By calling and asking if there are any deals available you could start saving easily. Your cell phone is another example. Look at your usage and consider adjusting your plan, or opt to join the company plan if possible. Do you have student loans? Look into refinancing your debt to see whether you qualify for a lower rate.

Build your spending plan. Now that you know what you are cutting and keeping, create a spending plan around your approved expenditures. Although you won’t want to have a large miscellaneous category, do add in some flexibility for unplanned expenses like car maintenance or gifts. By allowing yourself a little leeway in your budget, you’ll have more luck staying within your overall limits. Add everything up and make sure your spending plan doesn’t exceed monthly take-home pay. You will also want to add a savings component to your plan.

Check it. To determine whether your plan is aligned with general guidelines, compare your budget to the following ratios:

Consumer debt ratio: monthly non-housing debt payments divided by monthly net (after-tax) income. This should be at or below 20%.

Housing debt ratio: monthly non-discretionary housing expenses divided by monthly gross (pre-tax) income. For homeowners, housing expenses will include principal, interest, insurance, taxes, and HOA payments. For renters, this will likely just include your rent and renters insurance. Your housing debt ratio should be at or below 28%.

Monitor and adjust. Each week, review your spending and see how you’re tracking to the plan. Adjust categories limits as needed, while staying within the confines you’ve set for yourself. Over time, the goal is to build good habits so you don’t need to monitor so often.

Budgeting isn’t fun, but it is a necessary evil. By putting all your spending in perspective, it will help you make informed decisions about your finances on a daily basis. If you’re saving up for a down payment on a home or even a honeymoon, odds are your monthly savings will need to be substantial. It’s easy to get derailed by pricey concert tickets or a weekend away, but is it worth delaying your goals? Maybe, maybe not, but at least now that you have a solid handle on your spending, you can make the choice that’s right for you.


Financial Planning Association of Massachusetts member Kristin McFarland is the Director of Strategic Partnerships with The Darrow Company in Boston. The Darrow Company is a fee-only asset management and financial advisory firm focused on building and preserving the wealth for their diverse client base.

Kristin McFarland is an investment adviser representative of The Darrow Company, Inc., an SEC registered investment adviser located in Massachusetts. The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting, or tax advice.

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