Practically speaking… a spending plan
If you believe a spending plan is really just a politically correct term for the dreaded word “budget” or a subtle lure to get you started on something that will restrain you from living life freely, my goal is to change your mind.
A plan for your spending is a proactive strategy that allows you to decide what to do with your money now to accomplish important goals later.
There are three simple components to a successful spending plan:
- Having a set of meaningful goals in mind.
- Knowing how much after-tax income is available.
- Prioritizing spending decisions that move you toward your goals.
Goals — First, let’s consider some basic goals. Do you owe anyone money, besides your mortgage company, on which you are paying interest? If so, prioritizing this debt payoff is a liberating place to start. Do you have an emergency fund? Are you saving for college or retirement? While everything initially may appear to be competing goals, prioritizing them in your spending plan begins to move the needle mentally and emotionally in the right direction. Take a piece of paper and jot down some goals now.
Income — Once you have identified your top financial goals, estimate how much income you have available after taxes. To do this, look at your past three months of payroll stubs. If you are self-employed, look over the past year to get an idea of a monthly average (assuming the overall amount is about what you expect in the year ahead). Now that you have this monthly amount in mind, let’s work on expenses.
Expenses — If tracking expenses is new to you, a word of encouragement—be patient with the process. It typically takes about three months to get a realistic picture of how you spend money. Begin by listing nondiscretionary items such as your mortgage/rent, insurance, property taxes, utilities, telephone, debt payments, taxes, periodic expenses and giving. Discretionary spending can be more difficult to track because these expenditures have a way of simply slipping through the cracks in what I call mindless spending. The easiest way to identify these expenses is to use cash. As you spend cash, replace it with receipts and at the end of the month you will know how much you spent on groceries, eating out, coffee stops, etc.
This can be a revealing exercise. I spent a number of years early in my financial planning career helping people establish spending plans. I remember one couple who was absolutely convinced they had no margin to invest in their future. After tracking every expense with cash for three months, they were quite surprised to find they were spending more than $200 a month at Starbucks. After quantifying several items like this their decision came down to one of prioritizing things like that daily trip for coffee vs. paying down credit cards and investing in their future.
You can make your income/expenses spreadsheet as detailed or as simple as you like—the point is just do it! I still use the same electronic spreadsheet I started using several decades ago. If you need some help, here are some excellent resources (many of which are free) to get you started.
Compass (downloadable spending plan template under resources)
Dave Ramsey (enthusiastically geared toward debt repayment)
Mint (manage multiple personal finance areas)
Additional resources for direct debt counseling:
Keep in mind this is not a one-time event, but rather a dynamic process that pays huge dividends as life changes. My husband and I make a habit of reviewing our spending plan annually to ensure we are on track toward our goals. The bottom line is this: Do you want to work for money the rest of your life or make money work for you? Whether single or married, income MUST exceed expenses to achieve stability and then eventually attain goals.
Delayed gratification today in order to save for a future benefit is a key component in financial maturity. I hope I have challenged you to get started on this critical part of your life and maybe even convinced you that a spending plan is neither restrictive nor burdensome, but rather a friend that can help you live life intentionally and fully!
Thompson is a certified financial planner, and co-founder and CEO of One Degree Advisors, Inc. She speaks on financial topics and is a mentor for financial professionals, she also serves on the board of directors for Kingdom Advisors. Learn more at onedegreeadvisors.com. Advisory services offered through One Degree Advisors, Inc. Securities offered through Securities America, Inc., Member FINRA/SIPC. One Degree Advisors and Securities America are separate companies.