Planning your spending
A spending plan is like a map of where you want to go financially. If you load your car for a trip and head east with no other objective in mind, it is hard to know when you’ve reached your destination.
It’s equally hard to get out of debt if you haven’t determined how much debt you are really in. And it is hard to save money if you haven’t decided for what you are saving.
Take a few minutes and list all the things you’d like to achieve financially. Once you have a definite idea of what you want, you can plan the steps needed to make it happen.
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The first step is to plan next 12 months. Identify specific times and amounts, such as pay off credit card (this assumes that no additional charges will be made on this card before it is paid off), save $1,000 for a mini-vacation, save $600 for Christmas and pay off car (specify a certain amount). If 12 months is too short, select a time frame that is more realistic and comfortable.
What you have just finished listing are short-term goals. These will get you out of debt and allow you to begin building the stable financial foundation that leads to freedom.
To become financially healthy, temporarily cutting back is not a solution. Learning how to spend differently is. A spending plan or budget is a tool to help you achieve your short-term financial goals and to help you spend differently, so you will control your money, rather than allowing it to control you.
A spending plan that works must include all your monthly expenses, including the unexpected, and be easy to maintain. You must learn how to fold goals into your spending plan.
A spending plan has six distinct parts:
- Regular monthly expenses.
- Infrequent/occasional expenses.
- Unexpected expenses.
- Entertainment and fun expenses.
- Debt payoff expenses.
- Total monthly income.
Regular monthly expenses include items such as the mortgage (or rent), utilities, food, church, life insurance, credit card payments, child care, etc. Make a list of all your monthly expenses and amounts.
Infrequent or occasional expenses may occur quarterly, semi-annually or annually. These expenses, though usually known ahead of time, always seem to surprise us and occur at the most inopportune time.
By making yourself aware of approaching expenses you can prepare for them. These expenses include insurance fees that aren’t paid monthly, holidays, birthdays, quarterly income tax payments, property taxes, charity donations and vehicle licences.
List all occasional expenses that will be coming up the rest of this year. List them under the month in which they become due. Total the infrequent or occasional expenses for the year and divide by 12. This will give you the amount you need to include in your spending plan each month.
Unexpected expenses include emergency car repairs, broken appliances and family emergencies that require travel. To get an idea of what type of expenses you might be facing, look at what last year’s surprises cost. These differ from occasional/infrequent expenses in that you have no way of knowing when emergencies will occur.
Review your previous year’s cheque register or cancelled cheques to jog your memory about unexpected expenses. The process will also make you aware of where you spend impulsively and what it costs.
Also, review your credit card statements to identify charges that were necessary (emergencies) or unnecessary (needless expenses). By totaling this amount, you will identify how much is needed in a separate account for emergencies. It may take several months or a year to build this account. Identify it as one of your goals and build it into your spending plan.
Entertainment and fun expenses may show up under your list of needless expenses. It is better to be reasonable and allocate money for some outings that you’ll end up doing anyway. Build the expense in and you won’t have any reason to feel guilty.
Debt payoff expenses will help to accelerate your debt payments. Once you have established a working spending plan, the second step to financial independence is ridding yourself of all debt. Interest that companies charge keeps you from doing the things you’d really like to do.
Pay loans quickly
In order to eliminate debt, you must attack each and every bill as aggressively as possible. List all loans, credit cards and mortgages on which you make monthly payments. To reduce debt more quickly, increase your loan payments on your smallest loan with any additional money you can spare. This will pay the loan faster and reduce the amount of interest you pay. Once that loan is paid, add those monthly payments to the next smallest loan.
Total monthly income is all of the money coming into the household that can be used for meeting the expenses that you have identified. This could include salary, child tax benefit, child support and rental income. Ideally, there will be more income than expenses. Realistically for the first few months there will probably be some adjustments needed.
The key to a spending plan is to learn how to control your spending so that you can position yourself to buy the things you want.
(Source: The Stop Beating Yourself Up For Spending When You Can Really Have It all Budgeting Workbook)
