One term you will very rarely hear me use is budget! Only 1 in 3 households has a budget, according to a recent Gallup survey. I feel like the term budget is synonymous with the term diet. Just as diet culture has put negative talk into our brains, so has budget culture. With the term budget comes this feeling of dread, artificial limits, and guilt. Let’s be more positive about managing our money! It’s a great thing to have money come in and get to use it as we see fit – that is called living. So, instead of budgeting, I’m encouraging you to put together a spending plan! An effective spending plan at that!
What is a Spending Plan
With a spending plan, you don’t have to do what you did last month or last year with your money. Instead, you are estimating how you will spend your inflows of money in the future (month, quarter, year). As we move through the years and different cycles of life we can’t solely depend on what we’ve done before to be representative of how the future will happen. Just like with investing, you can’t rely on past results to predict the future.
For example, in 2020, our spending was flipped upside down, we didn’t eat out and we bought a lot more groceries. We paid less for gas but more on house projects and decorating. In 2021, we tried to find a more even balance, we did a bit of travel, and we purchased a new car. In 2022, we hope to prioritize travel and education. These are things that are important to us. You likely had different goals during those years! And that is the beauty of a spending plan, you have the control to decide what you want your future to look like financially. You have the opportunity to use your power to drive your spending in ways that ensure your needs are met and you get to be, have, and do, what you want most.
Yes there are best practices in the financial world, like having 3-6 months of emergency savings and ensuring you get all of the retirement benefit match you are entitled to, working towards becoming debt free and staying debt free. However, you get to choose your timeline on these things! You get to balance how much you put towards being responsible and how much you put towards living as you move through life. Ultimately, the goal is to have the emergency funds sitting there, contributions to retirement automatic and habitual, and then getting to really decide what it is you want most and getting to be, have, and do a little more!
A Story about Living
I know Dr. Thia tells this story in her courses; however, I’m not sure I’ve shared it here on our blog. So, today’s the day! At the start of a new year, Dr. Thia (my mom) was talking with her mom (my grandma). Dr. Thia asked, “What are your goals this year?” My grandma in her mid-to-late 80s at the time, said “Living with a capital L.”
It kind of stung Dr. Thia for a moment and the meaning then sunk in. My grandma was saying that she wanted to live the year to her fullest. She may have been in her 80s, but she wanted to use that time to mean something and to enjoy life. So when I talk about living, I usually capitalize the L in paying homage to my grandma.
8 Spending Plan Tips!
1. Don’t Wait to Create a Spending Plan
My first two tips on creating an effective spending plan have all to do with your mentality! So often our education here at MPower Co starts with how we think!
The first tip to creating an effective spending plan is not to wait! You may think that next week you’ll have better information, or perhaps after you make your next big career move you can get serious about managing your finances. Don’t wait! Managing your finances and spending your money effectively is a habit you need to build, if you’ve not already started to do so. You know enough today to know what you know and what you don’t know with respect to your income and expenses. You have the resources (account statements, etc.) to fill in the gaps.
There is no need to wait to put together an effective spending plan!
2. You Cannot Foresee The Future
Good money management is all about doing the best you can with the information you have right now and adjusting as life happens. I am here to tell you there is no perfect spending plan! At a minimum, you cannot know how the world is going to change.
For example, President Biden a month ago indicated student loan repayment would be back in effect in February of 2022, and then a few weeks later extended repayment beginning to May of 2022. This affected our spending plan!
You also don’t now how your loved ones are going to change and how their life changes affect your spending plan (i.e. attending a family wedding, gifting to new grandchildren, etc.).
All of this to say, don’t let the unknown of the future freeze progress. You know what you want most with how things are today and putting a B+ spending plan into place is a lot more effective than having nothing!
3. Know What You Need and Want Most
In my post last week about moving into the new year to manage money better, I talked a lot about goal setting. An effective spending plan starts with knowing what you truly need and what you want most. We live in a world that tells us repeatedly what it thinks we should have (i.e. the big house, the fastest car, the highest paying job in the corporate setting, luxury everything) and that we should have it all right now.
Perhaps those things matter to you, but my guess is more than likely they don’t. Additionally, none of us can have everything at once. Dr. Thia says, “We have the right to have our needs met and what we want most.” That doesn’t mean we can have it all, right now. So, before you can put anything to paper, it’s important to step back and take stock of what needs are not being met and decide what it is you want most in the short term and long term. This way you can set up a spending plan that can make Living life a reality!
While I’m talking about goal setting, let me remind you of our free resource that can help you put your goals to paper in less than 30 minutes. Just writing them out and prioritizing them can help you have more focus. If this could be of help to you, download our free resource today!
4. Understand How Income Varies Throughout the Year
You may be in a situation where you get paid once a month or once every other week, and your income is stable. That makes it easy to know what income you have to count on! That’s not the case for all of us. Some of us have income swings based on the seasons. Some of us get bonuses or stock options at specific points of the year.
In 2021, the company that Mark, my spouse, worked for sold to another company. The timing of his income changed. He also is an adjunct professor, so his income from that side-gig is only related to when he teaches and varies based on the number of courses he teaches. Taking time to review past years and determine how expectations could be different in the year to come is critical to putting together an effective spending plan.
5. Be in Tune with Your Spending Habits
Creating an effective spending plan won’t happen unless you are in tune with how you currently spend money. If you have no idea what your spending habits are, it’s time to start tracking your expenses for 30 or 60 days or review two months of last year and really get into the detail. While we are not going to create a spending plan only on how we spent money in the past, there is a lot we can learn and use to help us create a more effective spending plan.
For instance, I know we fill up our main car weekly and our other car about once every three weeks. I know we pay for our HOA in January and our property taxes in December. We buy Mizzou football tickets in March and get two wine shipments a year. It’s easy to forget about these non-regular expenses, especially if you’re preparing a spending plan at the start of the year. However, these items (your version of them!) must be in your spending plan for it to be effective. These items add up, and if not accounted for can really hurt your day-to-day financial management, by increasing your need to dive into emergency funds.
6. Pay Yourself First
Once you have a good grasp on your income and day-to-day expenses, you can really dive into the fun part of creating a spending plan. You can make sure that what you are spending money on is within your value system and pays your goals first.
For instance, if you have a goal of buying a car with cash in three years, you can create a line item in your spending plan to put money towards that goal. If you have a plan of going on a European vacation as soon as you feel comfortable and pandemic related laws will allow, you can create a line item in your spending plan for that! If you want to buy an expensive handbag or daily coffees without guilt – put it in your spending plan!
If you realize you are spending too much on subscriptions that you aren’t using, take them out of your spending plan (you must actually cancel them!!!) or if you realize you are buying too many unnecessary items at the expense of something else you want more, stop buying the items! Edit your habits reasonably, so that your spending plan can be effective.
By editing your spending plan and adjusting your focus you can ensure you are staying within your means and are Living the life that you want! If you are staying within your means there is no need for feeling dread when it comes time to pay bills, guilt for having or doing something you wanted most, or a feeling that there has been an artificial limit on Living.
7. Automate What You Can
One of my favorite tips to creating an effective spending plan is to automate as much as you possibly can. Once you’ve set your spending plan into place, put your finances on autopilot. Create automatic transfers from your checking account to paying for your needs and most important wants. This way you don’t have to think again about if that’s really the way that you want to use your finds. It minimizes the chances you will give up what you want most for what you want right now.
With automation, I’m talking about automating bill payment and also goal payment. Set up your saving for goals in a way that you can ensure you are really setting the money aside for the goals.
Of not, though, there may be bills that you don’t want to pay automatically. For instance, Dr. Thia doesn’t trust her phone carrier. She always finds random charges on her bill that she contests before paying it. I have automatic notifications set up for mine and get text messages about my balance, so I can see that from month-to-month my bill is the same (I use a different carrier, though). For us, we always pay off our credit card in full; however, I want to review the statement for erroneous charges each months and as a way for ensuring we are spending within our means.
8. Monitor and Adjust as Life Happens
Just as I said at the beginning not to wait to create a spending plan, don’t be afraid to adjust your spending plan. You did the best to create your spending plan with the information you had at the time. Life happens – job changes, job loss, car accidents, health issues, changing goals, etc.
Remind yourself when you are making updates to your spending, that this is part of Living. You have new information that affects what is needed and what is most important to you moving forward and that is okay! Making small changes and updates is better than getting six months, a year, or more, down the road feeling like you need to re-create the wheel to get on top of your finances.
Want Support in Creating an Effective Spending Plan?
Take one of MPower Co’s courses! In our courses Richer Retirement and MPowered Couple we provide you with the education and support to help you create an effective spending plan. In each of these courses you receive our master workbook that will walk you through the process of monitoring your spending, creating a net worth statement, creating a spending plan and more. To learn more about Richer Retirement, head to the course page to learn more about how to start living your richest life now. To learn more about MPowered Couple, head to the course page to learn more about how we support couples to come together around the number one topic that tears relationships apart – money.