How To Create a Spending Plan for Frugal Living

by Gary Foreman

What does a typical spending plan look like? And what should yours look like? These guidelines can help you set up a frugal spending plan that can hopefully keep you out of financial hot water.

Dear Dollar Stretcher,
From the total salary, what percentage is ideal to spend for various needs, and how much should be saved for the future?
Dee

It’s a question that we all must answer. Even if some of us would prefer to ignore it!

With rare exceptions, we all have to deal with having just so much money to cover all our expenses. And, if we spend more than we take in for very long, we get into trouble.

Let’s look at a “typical” spending plan. Then we’ll discuss how to create your own spending plan for living frugally and paying out less than you bring in.

A Typical Spending Plan

The first thing you’ll notice is that I didn’t include any taxes (either income or Social Security). You can choose to do that if you like (in fact, it’s a real eye opener). For our purposes, it’s easier just to deal with your “take home” pay.

The second thing to notice is that this is a guideline, not a straightjacket. The truth is that very few of us will fit into this exact framework. So if your spending doesn’t match, don’t despair! Analyze the situation before you panic!

For instance, maybe your entertainment spending is closer to 10%. Is that a problem? Maybe not, if you’re young, single and sharing an apartment with three friends. In that case, what you save on housing is going for entertainment, so overall you’re not spending more than you’re making.

Or you may be a city-dweller where housing is very expensive (think NYC). However, because of public transportation, you don’t own a car, so the extra that you spend on housing is offset by the reduced spending on transportation.

You get the idea. Tailor your spending plan to your needs. And, adjust it as you go through life and your needs change.

Related: Why You May Need a Spending Plan Instead of a Budget

How To Categorize Expenses in Your Spending Plan

One other thing to notice is that housing, food and auto make up the lion’s share of the expenses. That’s true for almost everyone. It’s in those three areas that most families get into trouble. Most often, it’s by buying a home or vehicle that they cannot afford. Once the commitment is made, it’s very hard to undo.

You might wonder where a certain expense goes. For instance, household cleaning supplies. Many people buy them at the grocery store. So are they a housing or food expense? The answer is that it doesn’t much matter. Put them wherever it seems best to you. The key is always putting them in the same place, so you can compare results from month to month.

Another common question is what should I do with charitable contributions. You can either take it off the top (like taxes) or create a separate category for it. If you believe that contributions should come before your expenses, you’ll want to take it off the top. If you think that it’s part of your regular spending, then include it as another expense category.

How Much You Should Be Saving

Finally, let’s look at Dee’s question about saving. There probably isn’t any single right answer because saving isn’t really an expense. It’s an investment for a better future.

So I prefer to think of savings in terms of priorities. Before I can put money aside for savings, I need food and a reasonable shelter. I probably also need dependable transportation to get to my job.

After those basic needs are met, it’s time to begin saving some money. It doesn’t necessarily have to be the 10% in our guidelines, but save 2, 3 or 4%. Have enough saved so that there’s some money set aside for the so-called unexpected expenses that happen to us all (dead appliances, home and auto repairs, unexpected sickness, temporary lack of work).

Related: How Much of an Emergency Fund Do I Need?

What About Debt Payments?

Paying off debt (especially credit card debt) is a little like savings. Consider payments used to reduce the amount owed as if they were savings.

Finally, for those of you who don’t want to bother with any of this, you’re thinking, “I’m fine and don’t need any help monitoring my money.” Just remember that most people who are in trouble today said that the same thing when everything looked good to them.

• Pay Off Debts or Save First?
• A No-Budget Spending Plan
• Living on a Tight Budget Simply and Successfully (+ Tips)
• How to Make ‘Pay Yourself First’ Work for You
• Lower Your Financial Overhead to Avoid Money Problems

Reviewed December 2022

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.