Do you ever find yourself living paycheck to paycheck? Does your savings plan consist of saving whatever you didn’t spend in between two paychecks? Have you ever put off paying a bill so you can do some spending on something fun? If you said yes to any of the three questions you aren’t alone.
The fact is many of us are better at spending than we are at budgeting. We have the best of intentions when we get a paycheck, but for various reasons (often emotional) we find ourselves spending a little too freely. For those of us who struggle to spend money wisely, we need a plan. The following sections outline a basic process for creating a spending plan that puts your money to its best use.
Put it in Writing
Of all the steps this is the most difficult. For those of us who are great at spending this is often a reality check moment. This is the step in the process where our emotional ties to spending begin rearing their heads. You might dig deep for some extra will power or the support of another person to move forward.
Start by writing down three obtainable financial goals at the top of a worksheet. Set a short, medium and long range goal. Make the goals achievable and time sensitive. These will be your bellwethers as you make your way through this process. Use them to guide your spending decisions throughout the planning process.
Next, list your income in one column and your expenses, both necessary and discretionary, in another. You may have to take a month to log expenses or look back at bank and credit card statements. Be honest and accurate! Do your expenses outpace your income? Do you see any patterns? Where are you spending most of your income? Do your current spending patterns fit with your financial goals?
Prioritize where you spend your money.
Prioritizing expenses such as rent and groceries are no brainers for nearly everyone. But what about spending beyond absolute necessities? For anyone who struggles with holding onto their cash it is essential to go through monthly expenses and honestly rank the importance of each expense in relation to your financial goals.
During this step, insert the original three financial goals with which you started. Financial goals can’t come to fruition if you don’t make them a priority expense. Priorities change so it’s likely you’ll find one or two of those initial goals to be low on the priority list at first, but making at least one a near top priority is a good start.
Analyze and Adjust
It won’t take a financial advisor to see how well your actual spending matches up with the priorities you set. Don’t be dismayed if things look a little out of whack. We live in a consumer driven world that constantly skews our financial priorities at key moments. All we can do is regularly analyze our spending habits and make adjustments as needed.
We spend money on things we enjoy, making the thought of cutting spending painful and difficult to confront. Rather than completely cutting out a trip to the movies or going out to lunch, think about cutting back a little bit in each area to help prop up other categories of spending. If you go to the movies, consider substituting a Redbox rental half the time or switch from going out to lunch weekly rather than daily. By scaling back or substituting across many areas of spending we find that we can have most of our cake and eat it too.
Coming up with a strategy in how to use finite resources is one thing, but what about tactics for making the plan work? Automation and cash payment are two simple and effective tactics for implementing and committing to a spending plan.
Have you ever found yourself holding a bill and making the choice to pay it later, only to over spend the money budgeted for the bill on something else? Setting up auto-payments for debt payments, bills, and savings deposits increase the chances for you to adhere to your spending priorities.
For discretionary spending like eating out and entertainment, consider switching from using a debit or credit card to using cash. The tangible quality of cash makes it easier to monitor spending in situations where spending can quickly get out of hand. Additionally, watching cash transform itself from a few crisp, new $20 bills to a hodgepodge of singles is a reminder of just how finite money really is.
This all seems suspiciously like a budget, doesn’t it? In some respects it is. However, the idea of a spending plan is to create a system of cash management that fits in with the spender’s already established habits and attitudes toward money. Instead of expecting the spender to change deeply ingrained connections to money, a spending plan allows for individuals to create a plan that fits their perspective on money.
While a spending plan isn’t for everyone, we nearly all employ methods for keeping runaway spending in check.
Do you use any spending strategies? If so, leave them in the comments!