There's no right or wrong way to budget your money, just like there's no perfect way to spend it. But, that doesn't mean a little planning can't help you get closer to your savings goals.
If you take the time to write out a monthly budget, you may find you're able to better organize your finances in terms of how much to spend on experiences, savings, and regular bills. And, despite what anyone says, budgets don't have to be restrictive. If you use a budget to create a comprehensive spending plan, you should budget for more than bills; you should budget for entertainment, vacations, and fun, too.
This leads us to the concept discussed in this post – spending money. Generally speaking, "spending money" is extra cash you keep on hand to pay for daily expenses like gas for your car and splurges like going out to eat. You can budget a set amount for this category, but you should ideally be able to spend it how you want.
Four Steps to Budgeting for 'Miscellaneous' Spending
Still, if there's one problem new budgeters always face, it's how much to set aside for spending money every month. No matter how disciplined you are – or how dedicated you are to your goals – you will need money to spend on a daily basis.
And, it's not just as easy as figuring out the minimum amount of money you can get away with spending each day or each week. You work to pay bills, but you also need to live. Ideally, you should strive to find a balance that lets you spend some money now without detracting from your future goals.
Whether you're budgeting for the first time or considering giving it a try, it's important to know how to budget for life's "extras" so you can set yourself up for success. Here are four steps that can put you on the right track:
Step 1: Track your spending.
Before you set a budget for your discretionary spending, it's important to see some historical data for this category. The best way to see how you've spent in the past is to break out your bank and credit card statements to track your spending in each relevant category.
Once you have a few month's statements to work with, tally up all your spending in important categories like:
- Dining out
- Rent or mortgage
- Car payments
- Gas and transportation
While some of your expenses — like rent or car payments — should stay the same every month, you should have plenty of variable categories to consider. Start by evaluating each of these categories individually as well as which ones you want to add to your permanent budget.
For example, if you're spending $300 per month on gas for your car pretty consistently, you should probably give that expense its own permanent budget category. And if your utility bills can be estimated, add those to your budget, too.
Everything else – everything within your control – should go into your miscellaneous discretionary spending category. For most people, miscellaneous spending might include purchases like:
- Coffee shops
- Gas station purchases
- Convenience stores
- Dining out
- Lunch at work
Step 2: Define which 'wants' are important, and which you can safely scrap.
Once you have a good idea of how your miscellaneous spending looks, you might be mortified. If you haven't budgeted in the past, but know you need to, chances are good you're spending more than you want or thought you were.
With the cold, hard facts right in front of you, you can no longer hide from outrageous spending or pretend it's not a problem. Before you come up with a miscellaneous spending limit for your budget, it's smart to see which of your expenses can be whittled down.
Start with the easy stuff. If you're spending $8 to $15 per day going out with the girls for lunch, ask yourself if you're willing to brown bag it at least a few days per week. Spending a lot on clothing or the golf course? See what kind of sacrifices you'd be willing to make to lower the amount you're spending in these extra categories.
Unfortunately, digging into the nitty-gritty of your spending is at the core of building a budget that works. As you set your miscellaneous spending cap, figure out what you can live without and plan to make adjustments accordingly.
Also, keep in mind that your current level of spending might be perfectly okay. If you're saving for retirement, building an emergency fund, and meeting your other savings goals, then going out to lunch a few times per week or buying new clothes every month may not be standing in the way of your dreams.
Just keep in mind that today's spending may prevent you from living the life you want in the future — or at least delay it by a few years. If you're spending $15 per day on lunch five days per week, that could mean you'll have less money for dining out later on, once you retire. While you shouldn't let this deter you from having fun, it's important to think not just of how to spend today, but how today's purchases can impact your future self.
Step 3: Define your 'musts.'
Whether you want to reduce your spending or are pretty happy with where you're at, it's still important to define your "musts." While you might need to go on a bare-bones budget to pay off debt or overcome financial hardship, most of us want some wiggle room in our spending plans. And even if you're fine with your spending as-is, defining your musts can also help you prepare for any upcoming changes in your budget if, say, you lose your job or take a pay cut.
Your "musts" should include all daily spending you can't live without. You need to put gas in your car, after all. You need to eat lunch during work, whether you choose to dine out or bring a boxed lunch from home.
Chances are also good that at least some of your miscellaneous purchases are important enough to your mental health that you want to prioritize them. And that's the whole point of budgeting: to better use your limited resources on what really matters to you.
Maybe you're unwilling to give up your daily coffee because it's the best part of your day. Or, perhaps you're willing to give up cable television or going to the movies if it means you're able to shop for new clothes.
Budgeting is all about trade-offs, but hopefully, you can work some of your "musts" into your long-term spending plan.
Step 4: Come up with a weekly or monthly amount.
Once you've considered how you've spent money in the past, what you're willing to cut, and the 'musts' you want to keep, it's time to come up with an amount to stick to in terms of miscellaneous spending. If you're budgeting on a monthly basis like most people, you'll want to reach a monthly amount of cash to set aside.
Let's say your past miscellaneous spending has been unsustainably high, but you're willing to give up a few things. Here's how a person's pre-budget and post-budget miscellaneous spending might look:
Pre-Budget Miscellaneous Spending:
- Work lunch with friends five days per week: $15 per weekday or $300 per month
- Morning coffee five days per week: $15 per week or $60 per month
- Snacks at gas station convenience store: $80 per month
- Clothes: $300 per month
Monthly total: $740 per month
As you can see, the person in this example found a few different ways to save money on random spending – without giving up their morning coffee run.
They eased up on going out to lunch every weekday down to just twice a week. Instead of fueling up at the gas station with the convenience store (and all its tasty temptations), they started filling up at the bare-bones gas station down the street. And they removed their stored credit card information from their favorite retail websites, making checkout just cumbersome enough that they stopped short of buying some shoes and clothing they didn't need.
As a result, they were able to cut their miscellaneous spending from $740 per month down to $340 a month. Ideally, this should help free up $400 a month more for savings, debt repayment, and other long-term goals – including fun stuff like vacations.
If you've been trying to budget but keep letting your random purchases get you off track, the best thing you can do is create a spending plan for the purchases you make most. At the same time, you should strive to cut out or reduce spending on items that don't bring you happiness or add real value to your life.
Also keep in mind that none of this will work if you don't track your spending religiously and grow an emergency fund to cover the "what ifs" in life.
What if your roof needs repaired or replaced? What if your car breaks down? What if you have a medical emergency?
While your miscellaneous spending category may be able to cover some smaller unexpected expenses, you need a full-fledged emergency fund to cover the big stuff. Without one, you are destined to go over budget time and time again.
Remember, the best way to win at budgeting is to plan. And that means more than planning for your mortgage and car payments; it means creating a realistic plan for spending money, too. With a comprehensive plan in place, you give yourself the best shot at controlling your spending and making every dollar you earn count.