Financial: Develop a Spending Plan

If the word budget sends you racing from the room, you aren't alone. Most people view budgets as dreaded tools that leave them feeling deprived when they stick to them and guilty when they don't. Sometimes, of course, it's not you but a spouse. Or maybe it's your adult children who seem to have trouble managing their money. Either way, without some roadmap you fall into the trap of overspending, leading to unmanageable debt load and the cycle of living month-to-month.

Impulse spending, the urge behind a thoughtless (and often useless) purchase, has scuttled many a financial plan. Fortunately, a simple strategy like developing a spending plan can help you take control of your basic finances.

A spending plan helps you

Achieve your goals without taking on more debt
Adjust to a decreased income without necessarily making major lifestyle shifts
Get as much out of your money as possible, possibly reducing debt at the same time

It's all about a reality check

As long as you're ignoring the reality of your spending, you'll be unable to reach your goals, whether they're putting an end to creditors calling, living within your means, or building a nest egg.
In order to gain control of your finances, you need to look honestly at what's coming in, where your money is going, and how you can effectively restructure your spending.

Know what's coming in

If you're over- or underestimating your household income each month, your spending plan isn't going to work.
Determine exactly what's coming in from all sources.
If your income changes with the season, or month-to-month, establish the lowest and highest amounts you expect to receive so you can work with your actual monthly income, regardless of fluctuations.

Track the amount going out

Although it may seem extreme, try keeping a small book with you and write down every expense, from the mortgage payment to a pack of gum.
Beware: this is where most people give up and revert to mismanaging finances. They claim that writing down every little payout is too difficult, but the truth is that most people are afraid to closely scrutinize their spending habits.
When you're not looking, it's easy to convince yourself that paying $7.00 a day for your after-work drinks is of little consequence. When you write it down and total it up at the end of the month though, that $140.00 is harder to ignore.

At the end of the month, place each entry from your spending book into one of the major expense categories. Your categories may look something like this:

Housing
Insurance
Utilities
Childcare
Food
Transportation
Entertainment
Charity
Other

Analyze to prioritize

There it is in black and white: A detailed record of exactly how much money is coming in and going out of your household each month.
Examine your spending in each category to see if there are areas in which you can cut back in order to have more money for the things that are truly important to you.
You may find that you need more income, or that you are spending too much on housing. This may mean you're facing some big, and perhaps difficult, decisions, but the resulting peace of mind from having enough money to meet your needs will be worth the effort.

Move to cash

Here's an exercise to change your habits. Try withdrawing the amount of money you normally spend each month on clothing, gas, dinners out, movies, etc. Reduce this amount by 10% and set it aside.
Now try to make the cash last. Avoid use of credit or debit cards, except for emergencies or extraordinary circumstances. Handing over cash for purchases is always going to prove more difficult than swiping a piece of plastic.
This use of cash could alter your spending habits, revealing where impulse purchases have strained things your budget -- perhaps a meal out when you could have prepared one at home or the purchase of an item that was later available at a discount.

If you manage to get by without dipping into the funds you originally set aside, there's the first step towards saving for a bigger ticket item or, more importantly, retirement. If you're ready to get your money, or that of your kids, working for you more effectively, call me to discuss creating your personal spending plan.

Article submitted by Velma Carroll, Ten Star Financial Services.
Phone: 905.634.8834
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