The third step toward getting in control of our money is to initiate a spending plan (make a budget some would say). Like it or not we must learn how to budget our money—to control our spending.
This is where “the rubber begins to hit the road”, as the familiar expression goes, because it is our spending plan that will enable us to use our money to achieve the things that are most important to us.
Typical Budgets are Self-defeating
Now the traditional recommendation for money management from most financial advisors focuses on making a “budget.” But when approached in the usual way a budget is nothing short of a disaster for most people.
Note:
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 the usual 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 normal budget a good 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.
Note:
If we don’t like the way we are spending our money we can change the way we are spending our money and then change the spending plan to reflect that change.
A good spending plan simply reflects the way we now spend our money. If we don’t like the way we are spending our money we can 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.
A small start is shown below identifying some usual catagories. You will need to expand it to cover all of your expenditures and investments.
OUR FAMILY SPENDING PLAN
Mortgage875.00
Home Utilities
- Electricity85.00
- Gas70.00
- Water
- Trash Removal
Maintenance
- Lawn Care
- Snow Removal
- House Repairs
Automobile
- Car Payment
- Gasoline
- Service & Repair
———————
TOTAL:????.??
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 home owners 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 spend 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!
Note:
Your goal is not to have a description of how you should use your money; it is to have before you an accurate picture of the way you actually do use your money.
Your goal is not to have a description of how you should use your money; it is to have before you an accurate picture of the way you actually do use your money.
After you have a number to put after each area you are spending money on, you can add them up to see how much you are actually spending now each month. But just as important, you will then know where your money is really going.
The Real 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.
Comment:
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. But first you need to know how you are spending your money now.
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 learn how to make a budget of the right kind, so if you do not have a spending plan in place you will want to get started on one now!
