underscored couple making spending plan instead of budget
CNN  — 

A lot of people don’t like to think about household budgets. They’re complicated. They’re time-consuming. They can be scary. Even the word itself — budget — sounds ugly, like some embarrassing sound your stomach makes after eating too much summer barbecue.

But you need some way to keep your finances on track, especially if you’ve recently incurred a huge, unexpected expense, lost your income or had your hours cut. Filing for unemployment can help replace some of that money, but it often won’t cover your entire missing paycheck.

So if you hate the idea of creating a budget, don’t. Instead, you can make a spending plan.

What’s the difference between a spending plan and a budget? Well, a spending plan allows you to choose what you must spend money on each month, and then gives you the freedom to do whatever you want with the rest.

Plus, it’s more fun to think about making a spending plan than a budget. Everyone likes spending money, right? You’re just going to plan how you spend it.

“Think of a ‘spending plan’ as a roadmap for how you’ll spend your money, rather than a list of ‘don’ts’ that restrict your spending — even if the end result is essentially the same,” said Andrew Schrage, CEO of Money Crashers, a personal finance site.

It’s also relatively quick to create a spending plan; you can probably do it in about an hour. So let’s take the time right now to set up our three “spending buckets” and make sure we have enough money to pay for what we need — and hopefully have a little fun, too.

Spending bucket No. 1 — Pay yourself first

When you get a check, pay yourself first by putting aside some of it for later.

You may have heard financial experts use the phrase “pay yourself first” and wondered what it meant. Well, it’s basically just a fancy way of saying that you should save some money for later, but do it when your paycheck or unemployment check first arrives, before you’ve spent any of it — not at the end with whatever you have left over.

Paying yourself first fits nicely into a spending plan, because it means you’re going to spend money on yourself first. It doesn’t mean you’re going to jump on the computer and order some new clothes (though we’ll get to that in a moment). Rather, you’re going to set some money aside to spend on yourself down the line.

You can call this account an “emergency fund” or a “vacation fund” or “college savings” or anything you’d like. But don’t get too attached to what you label it. The idea is that you create a pot of extra money to use later on something you really need or want, instead of right now as part of your regular monthly expenses.

If you’ve lost your job, it may seem like a luxury to put money aside for later, because you need every penny at the moment. But think of it this way: Eventually, you’re going to need some extra money, because the car suddenly won’t start, or a family member gets sick, or any of a number of unexpected events happens.

Even $20 a month in a jar on the kitchen counter will get you started. Twenty dollars may not seem like enough to make a difference, but you can slowly bump up that amount as you get back on your feet. You’ll be surprised at how quickly it can grow. And six months from now, when you suddenly need $100 to fix a clogged kitchen sink drain, you’ll be glad to have that cash on hand.

“People who pay themselves first tend to be more financially secure than those who spend as they earn,” explained Schrage. He said those people also move more quickly “down the path to financial independence — and, perhaps, early retirement — than less thoughtful savers, too.”

If you’re worried you’ll be tempted to “steal” that money from yourself to use during the month, put it in something like an empty washed-out beer bottle instead of a jar, so that you can’t get to the cash without literally breaking the bank. (And please, when you do eventually break the beer bottle, don’t do it like you’re about to jump into a bar fight. Put it inside a couple of plastic grocery bags and gently knock it with a hammer. Be safe!)

Eventually, you’ll want to set up an automatic transfer directly from your paycheck to a separate savings account, so that you’re paying yourself first without even thinking about it.

“Whether that savings is to retirement accounts, children’s accounts, or a taxable savings vehicle, we always recommend automating this step,” said Natalie Slagle, a certified financial planner and founding partner of Fyooz Financial Planning along with her husband, Dan. “As Dan and I know from our own personal spending habits, if we don’t save it, we find a reason to spend it.”

And when your savings get large enough, you can split the money up among multiple accounts and have a different label for each one. But for now, keep it simple, and just make sure you set aside something every month however you can.

Spending bucket No. 2 — The must-haves

The bills that you have to pay to survive go into this bucket.

Next, it’s time to determine what you absolutely have to spend your money on. This probably includes a lot of not very glamorous items, like rent, groceries or utilities — the bills you need to pay to survive.

There are two types of must-haves — fixed costs and variable costs. Things like rent or a mortgage payment are usually the same every month, meaning the amounts are fixed. They’re easy to calculate since they don’t change very often.

Other fixed expenses likely include your car payment, insurance for your home and auto, your cell phone bill and so on. (This is also a good chance to see if you can lower any of these costs. Check out our guide on how to take 30 minutes to reduce three major categories of household expenses for ways to cut with a minimum of pain.)

On the other hand, expenses like groceries or household items can change each week, so it’s tougher to put a number on them. You’ll have to make an estimate based on how much you usually spend at the grocery store and how often you go.

Don’t worry about being perfect here, and give yourself a little extra room by guessing slightly higher than lower. Some utilities, like your electric bill, may also change from month to month, depending on the season. Again, just give a rough estimate on how much you’ll spend on them.

“What we find is that the ‘variable expense’ category … slows most of our clients down when creating a spending plan, because then it feels more like a budget!” explained Slagle. “When this happens, we advise them to pick a figure (let’s say $1,000) for the entire category.”

But remember, this bucket is only for the things you absolutely have to spend money on. You may adore buying perfume or cologne, but it’s not a must-have. We’re not saying you have to get rid of it, just that it doesn’t go in this bucket.

Also, when you’re putting together your “must-haves” bucket, there’s one more important extra to include: the “expected unexpecteds.” Those are the random bills that seem to pop up like clockwork every month, but each time for a different reason. Your pet gets sick and a vet bill follows, or the shower head breaks and you need to take a trip to the hardware store.

These aren’t major one-time emergency expenses, which is what your “pay yourself first” savings are for. Rather, you just get endlessly dinged with these little annoying costs. You know they’re coming every single month, you just don’t know what they’ll be.

“It’s not always wise to tap your emergency fund for these ‘irregular necessities,’ because many are not life-or-death emergencies,” said Schrage. “But you still need to pay for them.”

There are two ways to handle these “expected unexpecteds” in your spending plan. One is to calculate the amount you spend overall on each of the little costs each year, and then set aside an average amount per month in your spending plan for each of them.

But if you don’t want to take the time to track down all those bills from the last few years and make a precise calculation, the other option is to just include one big “expected unexpecteds” category in your must-haves and pile all those little costs into it.

“I like to set at least 10% of my net spending money aside for miscellaneous expenses,” said Slagle. “What tends to happen is some months I don’t need hardly any of it, and some months I need more than what I typically set aside.” The leftover money from the months you don’t need it can then cover the months when you go over.

Spending bucket No. 3 — The fun stuff

Any money left over in your spending plan is for you to spend as you choose.

OK, this is the part we’ve been waiting for. Some experts like to call this the “discretionary expenses” bucket, but that’s just a fancy way of saying it’s the stuff you spend money on that you don’t 100% need. Which, by the way, doesn’t mean that you shouldn’t spend money on it. Even in tough times, you need things to inspire you and keep you going, which is fine, as long as you’re not overspending on them.

But with your spending plan, it’s easy to know just how much money you can afford for the fun stuff. Because whatever you have left after your must-haves and paying yourself first is for you to spend however you want.

In a budget, we’d try to account for every penny in this bucket. But with a spending plan, it’s up to you to decide as you go, and it’s perfectly fine if it’s not the same items every week or month. You can divvy up the overall total of this bucket however you want — buy new clothes, order a nice meal, get a new video game. But once the bucket is empty, you can’t spend any more until the next month or paycheck.

What if you don’t have any money left to put in this bucket? That means you don’t have any room to spend beyond the basics, which may be the case if you’re on a limited income right now. But don’t despair. If you want money to spend in this bucket, you can either work on reducing your expenses in the first two buckets, or increasing your income with a new job.

However, one thing you absolutely should not do is go into debt by spending money in this bucket. We talked last week about how it can be OK in an emergency to use debt to make ends meet, as long as you follow three rules. But you should only do it for items in the “must-haves” bucket if you can’t reduce your bills far enough. Don’t go into debt buying things you don’t 100% need.

A spending plan should change as time goes on

Your spending plan today will be different than your spending plan a year from now.

As you put your spending plan together, don’t think of it as final or permanent. For one thing, you probably won’t get it exactly right the first time you do it, and that’s fine. But it’s also going to change as you go anyway, which is why you shouldn’t invest a ton of time trying to make a perfect spending plan. Just make it as good as you can to start.

Then, as your situation changes, you’ll want to sit down every month for 20 to 30 minutes to take a look at your spending plan and see if you need to adjust it. Perhaps you got a new job and now have more money coming in, so you can increase how much you pay yourself first, or have more left over for the fun stuff.

You’ll also want to revisit your spending plan if there’s a major change in your must-haves. Maybe your rent increases, or you downsize to a smaller car and have a lower monthly payment as a result. Make adjustments as you go so you have the most accurate info on where you’re spending your money.

Just remember that your spending plan isn’t a rulebook telling you what you can and can’t do. It’s only a guide so you can see where your money goes each month, and then be comfortable knowing what you can afford.

Having money issues due to the coronavirus pandemic? Read CNN Underscored’s previous stories in this series: