CREATE A SPENDING PLAN – PART 1
Everyone from millionaires to paycheck-to-paycheck spenders should have a spending plan. A spending plan will help you get out (and stay out) of debt, save for the future, and achieve your financial goals. Don’t know how to get started? Here are the first steps to get you on your way to financial freedom using a spending plan:
- Track Your Spending
This is probably one of the most important pieces of putting together a spending plan or budget! If you don’t know where your money is going, how can you make a plan for it? Now, for those of you tempted to cheat and either just “estimate” your spending, or to start cutting back on spending just to make it look good on your statement…don’t!
The best way to track your spending is to gather up your past 2-3 months financial statements (bank accounts, credit cards, etc.) and use them to compile your recent spending habits. This way, you will get an honest, full look at everything you’ve spent recently and have unaltered data to work with.
You don’t have buy new financial software to manage your spending plan; there are plenty of free sites (like Mint.com), that will automatically retrieve your transactions and categorize them for you. Be aware that you will have to manually adjust some of the automatic categorizations. For example, if you shopped at Target and bought a few groceries, a pair of shoes, and a bottle of shampoo, Mint.com might categorize the entire purchase as “shopping” and you’ll have to tell it that you spent $23.64 on groceries, $18.95 on clothes, and $3.95 on personal care.
Now, I realize that since we are looking at transactions from the past month or two, you might not remember how much you spent on groceries, clothes, and personal care on that particular trip to Target. (New rule going forward: keep all receipts!) The main purpose of this step is to get a handle on how much you spend on a regular basis (even if you can’t put it in a specific category). If you are spending more money than you make, it doesn’t really matter if it was shoes or shampoo, you need to be aware of your spending habits in order to make changes to those habits.
After you get your recent spending totaled and (mostly) categorized…are you surprised by any of the numbers? Do you spend more on lunch during the workweek than you thought you did? Are you wincing at how much your credit card payments are? Did you tithe at all? The results of this exercise can truly be eye-opening! Don’t cry (just yet)…we’re going to take this data and use it in the next steps of our spending plan.
What have you learned about yourself from tracking your spending habits?
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