If you’re like most people, one of your New Year’s Resolutions is probably to get your finances in order. And a great first step in getting your finances in organized is to develop a spending plan to help you manage your monthly cash flow (money in, money out). But the most important part of developing the spending plan is to be inspired by your financial goals and life aspirations; this is what separates resolutions that fail by springtime versus plans and habits that can impact the rest of your life. The more you can visualize the whys behind what you are saving for, the more Inspired you will be to actually follow your spending plan and save money for the your future life– call it an “Inspired Spending Plan.”
Although we all know the importance of a spending plan (formally known as budget) you would be surprised how many people still have no idea where their money is going every month and year. The biggest reason individuals put off creating a spending plan is because they do not want to feel limited by what the plan allows. If you can re-wire your brain to think of your spending plan as a system to streamline your financial life then it will be a lot easier to create and implement one that works for you and your family, and therefore help create more simplicity and peace of mind in your life.
Here are 5 tips to help you create your Inspired Spending Plan and conquer your New Years resolution once and for all:
Understand what an Inspired Spending Plan is.
Seems basic enough, but again most people hate spending plans because they view them as stressful, rigid, strict, limiting, etc., and would probably prefer a root canal over setting up and utilizing a spending plan. In reality a spending plan is just a system for tracking and controlling the inflow and outflow of income. It helps you live within your means, save for your future goals, and make sure that your current financial life is in order.
Track your expenses for 90 days.
This helps you keep track on the types of things you are spending your money on and ensures you are accounting for all your expenses. Some typical categories include fixed expenses (mortgage, health insurance, car loan), variable expenses (food, gas, home/car maintenance), and discretionary expenses (hobbies, entertainment, clothes, etc.). There is no point in lying to yourself about how much money you actually spend or what you spend your money on. If you notice you are spending too much money on discretionary things such as dining out, hobbies, or personal care, then it is your responsibility to decide what and where to cut back.
Put it all together to create your Inspired Spending Plan.
To develop your inspired spending plan, you need to first analyze your cash flow. Start by calculating your monthly net income, then add up all your monthly expenses. Next, factor in your savings goals. Ideally you should be saving 10-20% of your income toward you goals. If you find that you cannot save that much, yet want to, then you will really only have two options: make more money or spend less money. I usually recommend to start with you income, subtract your fixed expenses, subtract your savings (10-20%) and THEN spend what’s left over on variable items or deposit it into your FUN money account.* (more on that in tip 4.)
If you follow this Pay Yourself First strategy (term coined by David Bach), you should be breaking even every month. Remember this is okay since you are actually saving just like any other bill.
Make sure you factor in Fun and Flexibility.
Remember it is a plan and that plans can change as needed. Flexibility is always an important ingredient in the planning process. Life happens and expenses will come up that you did not plan for, so make sure to give yourself some wiggle room. This will help you stay on track and not feel like the plan is too rigid. It is also wise to allow money for the activities you enjoy– the fun stuff. If you have money left over after your fixed expenses and savings goals are taken care of, allocate the extra money into a separate savings account titled FUN to use for the various wants that come up in life. For example; the extra meal out, the new pair of stilettos, or a wine tasting trip with your friends. I keep a wish list of things I want, and when the time comes to actually spend my Fun money, I review my list and decide what I will spend it on. This also helps control your spending impulses too. Sometimes I write things on my list to realize later that I no longer want it.
The whole point is if you squeeze out all the fun in your life, you will have a hard time following the spending plan and end of scrapping the whole plan, which is not a good idea if you want to become a Financially Wise Woman.
Make tracking your inspired spending plan easy.
Make things easy for yourself by using automated tracking systems to help you keep track of your monthly income and expenses. There are many free tools out there to help you so find the one that suites you best. Some will still prefer the old pen and paper tracking system to jot down everything they spend during the day. Others may want a more automated process and online tools with automatic tracking and alerts could work best. Whatever you prefer, remember it is your spending plan and therefore it needs to work for you and your lifestyle.