Figuring out what kind of budget works best for you can be a challenge, and there’s really no right or wrong answer. What works for one person won’t always work for another, and you may have to try a couple before you find one that fits. However, most people can benefit from some structure to their monthly spending that allows them to save more, pay down debt, and still have some left over for the fun stuff. One approach that you may like is called a spending cap budget.
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What Is a Spending Cap Budget?
In contrast to other types of personal budgets that start by taking money for savings right off the top, the spending cap budget (also called a spending ceiling budget) is a bit different. This is because it sets a monthly spending limit for all your expenses including savings and investing, rent and bills, and discretionary spending.
Once this money is gone, the idea is that you stop spending on everything until the next month rolls around and you have a new allocation. Compared with other budgets, the spending cap budget is one of the more straightforward and is therefore appealing to those who don’t want a lot of extra work tracking down every penny.
Who Is a Spending Cap Budget Best For?
A spending cap budget is ideal for someone who may be new to budgeting and doesn’t want anything too restrictive to start out with. It will also work best for those who are already pretty good with their personal finance and don't require a lot of oversight when it comes to managing their spending. Its flexibility also makes it ideal for those whose income fluctuates from one month to the next, since you can adjust each month if needed.
Advantages of a Spending Cap Budget
- Easy to implement and make changes to as you go
- Allows for emergency expenses since you know there will be extra money at the end of the month
- Can help you develop responsible spending habits and live within your means
Disadvantages of a Spending Cap Budget
- May be hard to resist spending beyond your self-imposed cap
- Doesn’t subdivide your monthly spending into categories which can make tracking more difficult
Spending Cap Budget Example
The spending cap budget is simple enough to set up, but determining the right amount to allocate each month and sticking to it can be harder. Be prepared to play around with it the first few months until you find a happy medium that works for you.
Take this example:
| Description | Amount ($) |
|---|---|
| Monthly Take-Home Pay | $4,500 |
| Spending Cap | $3,800 |
| Excess | $700 |
| ———————— | ———— |
| Mortgage/Rent | $1,750 |
| Insurance | $200 |
| Groceries | $550 |
| Utilities | $225 |
| Transportation | $250 |
| Entertainment | $450 |
| Student Loan Payment | $275 |
| Savings | $100 |
If you make $4,500 each month in take-home pay, you may decide that your spending cap each month is $3,800, leaving you with $700 in excess every month. This means that every dollar you spend in that month must be taken out of the $3,800 which could be broken down in the following way:
- Mortgage/rent: $1,750
- Insurance: $200
- Groceries: $550
- Utilities: $225
- Transportation: $250
- Entertainment: $450
- Student loan payment: $275
- Savings: $100
If you stick to your spending cap, you should be left with $700 at the end of each month. You can use this money however you like, but we would recommend setting it aside for financial goals such as building up an emergency fund, saving for retirement, or saving for your child’s college education.
How Does the Spending Cap Budget Compare?
| Type of Personal Budget | Description |
|---|---|
| Traditional Budget | Subtracts monthly expenses from income, ideal for beginners. |
| 50/30/20 Budget | Divides income into 50% for needs, 30% for wants, and 20% for savings/debt. |
| Zero-Based Budget | Allocates every dollar of income to specific categories until it equals zero. |
| Goal-Based Budget | Focuses on specific financial goals with some flexibility. |
| Spending Cap Budget | Sets a maximum cap on monthly spending to encourage savings. |
| Envelope System Budget | Uses physical cash in envelopes for different spending categories. |
| Pay Yourself First Budget | Prioritizes savings by setting aside money for savings first. |
| Sub-Savings Accounts Budget | Creates detailed savings goals within a primary savings account. |
| Anti-Budget Budget | A relaxed approach: save first, pay bills, and spend the rest freely. |
Does a Spending Cap Budget Really Work?
If you need help learning how to spend less money each month, a personal budget is a great way to do this. And, there are several different kinds you can try to find something that fits your needs.
Many people will like the spending cap budget because it’s easy to get started with and it’s relatively low risk since you should always have money left over at the end of the month should your spending go astray or an emergency expense pops up.
Do I need to track my spending with this budget?
Not necessarily, but you may want to gather data about your past spending habits before you decide on a spending cap. By looking back at the past three to six months you can get a good idea of the things you normally spend your money on and what a reasonable cap might be. Once you start to budget, how (or whether) you track your spending is really up to you. Some people can do this quite easily without much help, while others may benefit from using a financing app or monitoring their spending through their bank’s online platform.
What do I do with the extra money at the end of each month?
The extra money you save each month can really be used for anything, and ideally, this money is in addition to savings that are already accounted for within your monthly spending cap. The additional money can be set aside for either short or long-term goals and can also be separated into multiple areas. For example, if you're able to save an additional $500 a month, maybe $300 of it goes towards making a downpayment on a house and the other $200 goes into a vacation fund.
What do I do about larger expenses I only pay once or twice a year?
Most of us have non-monthly expenses such as insurance premiums, taxes, car maintenance, or holiday spending that we’ll need to fit into our budget somehow. Ideally, you can prorate these expenses and include them within each month’s spending cap (for instance, if your car insurance is $600 every six months, you would allot $100 each month for this). However, other costs may have to be addressed when they come up. For example, maybe you decide that all your excess money for the month of December is for holiday shopping, or another month’s extra money will be used to buy a new set of tires for your car.
