Do you have a spending plan? Or do you just wing it and hope for the best?
If you remember episode nine, The First Foundation of Financial Fitness, you’ll remember that you should spend less than you make. Hopefully, you are already doing that. Today’s episode takes that foundation up a notch to help you keep track of where your money is going.
In this episode, you’ll learn three types of spending plan structures, reporting mechanisms, and common challenges with spending plans. Let’s take a deeper dive into spending plan design so that you can determine which type of plan best fits your lifestyle so that you can reach financial independence sooner.
You will want to hear this episode if you are interested in…
- Have as much structure as you need and as little as you can get away with [1:12]
- Spending plan level 1 [1:52]
- Level 2 [2:51]
- Level 3 [4:25]
- The reporting mechanism [6:01]
- Your homework [8:50]
The default spending plan
Before diving into each type of spending plan, I suggest looking at where your paycheck is deposited. Having your income deposited into your savings account and then transferring the amount you need for expenses into your checking account will prevent you from living paycheck to paycheck and allow you to balance out variable income streams and expenses.
If you notice that your checking account balance goes up each month and you aren’t accruing debt, then you are in a pretty good place. However, if you want to accomplish more, you can look into new ways to save proactively and reduce your tax bill each year.
Income – savings = expenses
The second type of spending plan starts with your monthly financial meeting. Write out your monthly income, figure in your savings, then feel free to spend the rest on what you’d like. This is a great type of plan for busy professionals who are more interested in saving time than saving receipts and who aren’t tempted by debt.
Every dollar gets a name
Next is the platinum level of spending plans. The reason that the major financial gurus champion this type of spending plan is because it works. This is also a great type of spending plan for data junkies.
The downside is that you really have to work it. If every dollar gets a name, that means you must know and record where every dollar comes from and where every dollar goes.
If you don’t have a spending plan in place or are trying to get out of a messy financial situation, this plan can be a great starting point.
Pro tip: use as many spending categories as you need but as few as you can get away with. The more categories that you have the more likely you’ll make an error.
Spending plan challenges
Although tracking your spending is important, sometimes it can be challenging to categorize what goes where, especially with shopping giants like Target, Amazon, Walmart, and Costco.
Listen in to hear what I recommend to some of my clients who have trouble categorizing their spending from these types of stores.
Another pain point is for periodic expenses. Oftentimes we’ll have expenses that are due at irregular intervals–quarterly, every six months, or yearly. For these types of expenses, I suggest setting money aside in an accrual account.
Listen in to hear the homework and discover which type of spending plan best fits your life.
Resources & People Mentioned
- Episode 9 – The First Foundation of Financial Fitness
- Sample spending plan and flow chart