Develop a Spending Plan

The third step toward getting in control of our money is to initiate a planning process which will enable us to use our money to achieve the things that are most important to us. This is where “the rubber begins to hit the road”, as the familiar expression goes.

Budgets are Self-defeating

Now the traditional recommendation from most financial advisors focuses on creating a “budget.” But when approached in the usual way a budget is nothing short of a disaster for most people.

What happens is that most people will draw up a plan that describes what they suppose is the ideal way they should spend their money. It has little to do with the reality of their lives even though the categories of expense may be personal so it seems as if it does.

In short order a budget becomes an unreasonable restriction and a discouraging reminder of continuing failure. Soon after that it will occupy the waste basket, figuratively if not physically.

A Similar but Significantly Different Approach

What is needed is something that resembles a budget in appearance but is anything but a budget in many ways. I prefer to call it a spending plan. So what is the difference between a typical budget and our spending plan?

In contrast with a budget our spending plan is based on reality and is in no way designed to limit our spending in any area. In our next step we will discover a more effective and powerful way to do that.

Our spending plan simply reflects the way we are now spending our money. If we don't like the way we are spending our money we will first change the way we are spending our money and then change the spending plan to reflect that change.

Designing Your Personal Spending Plan

Take whatever time you need to draw up your own spending plan. It may take several months before it is fully formed. Simply keep track of where your money goes and organize the results on paper. Only a small start is shown in my visual. You will need to expand it to cover all of your expenditures and investments.

HOME EXPENSES

Utilities

1. Electricity
2. Gas
3. Water
4. Trash Removal

Maintenance

1. Lawn Care
2. Snow Removal
3. House Repairs

Automobile

1. Car Payment
2. Gasoline
3. Service & Repair

For each item you identify in your spending plan determine how much you actually spend per month and list it in a second column. Some items like insurance and real estate taxes are paid only a few times a year. For these add up the total for the year and divide by twelve.

Keep track of everything you need to until you find out where all your money is going. Include amounts for savings and retirement funds. In our spending plan we include these categories as if they were “expenses.” But remember, only put them down if you are doing them.

And don't leave anything out just because you think you shouldn’t really be spending all that money in that way! Your goal is to have before you an accurate picture of the way you actually use your money.

The Hidden Value of Your Spending Plan

Like your net worth statement, which I recommend be prepared monthly, the spending plan is a vital component of the financial control system. Most people have little idea of where a lot of their money goes.

You may be quite surprised when you see your actual records. But when you have the facts before you, that information allows you to make intelligent choices about changes you may want to make in the use of your money.

One of the most important values of the spending plan is that it allows you to know the amounts of money you need to direct to various expenditures through the allocation process we will explain in step four of our control system. You will soon discover how this amazing tool, your personal allocation system, is the key factor in getting total control of your money.

In order to start arranging your allocation system which I will explain next you need to have at least have a good start on your spending plan. There will never be a better time to get started, so if you do not have a spending plan in place you will want to get started on one now!