Principle 1: Spending Plans
A spending plan is often referred to as a budget. Even though most people think of cutting costs or penny pinching when they hear budget, it is a valuable tool that does not need to have a negative feeling for you. The spending plan is a system for how you spend your money. The spending plan should be viewed as a positive tool that helps you plan and achieve your long-term financial goals.
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Track Your Spending
To be truthful, tracking your spending is not fun or exciting. I have heard a wide range of excuses of why people don’t track their spending. Regardless of the excuse or reason, if you live paycheck to paycheck, are always in debt or have little or no savings then you need to begin tracking your spending. It is essential to making your spending plan work and achieving your long-term financial goals. In the beginning, it is smart to track it each day until you have a clear understanding of where you are spending your money. The more you track the more you will be aware of your spending habits. You will then be able to create a spending plan and create a plan of attack to stop unnecessary spending. You may be surprised at where you spend your money.
If you use your memory to track spending, you will be surprised at the inaccuracy of your memory. You will find a gap between what you spent and what your income was and wonder where all my extra money went. By physically tracking you will paint a picture of your spending habits as they actually exist, not as you think they exist.
There are a couple of points of interest when discussing tracking you spending.
- Tracking spending helps you to treat money as a tool. It will no longer control you, but you will control your money. You will become aware of your spending habits and improve your situation.
- You need to record every item. Make sure that anyone who is spending money in the house is working together to document all spending. The more accurate you are, the better the spending plan will be.
- Habits are an interesting topic. If you search the internet about how long it takes to create a habit, you will get a range from 18 days to over 200 days. The time needed to create a habit depends on your motivation and the severity of the act. What we know is that the more you do something, the easier it becomes. It takes a lot more energy to create a habit of doing something than of not doing something. You need to take the time to create the tracking habit.
- You need to categorize your spending. There are 6 main categories that BeingPreparedWorks uses for spending: housing, transportation, debt, savings, food, other. We recommend you use these categories, but you can use as many categories as you want. Our advice is to keep it simple.
- When you track your spending, it’s important not to jump to conclusions. This exercise is meant to help you discover your spending habits, not to change them. You will do that as you create your spending plan, analyze it and make adjustments as necessary.
There are many methods to track spending. You should find the method you feel most comfortable with and begin tracking.
Checkbook Register or Ledger Method
You can use the check register that comes with your checking account. The limitation with this method is that not all of your purchases will be from your checking account and the checkbook register is designed to balance your checking account.
You can also create your own ledger or purchase a ledger from an office supplies store. If you want to create your own, we have included a Spending Tracker. The trackers are designed for a week time frame. After each week begin a new tracker. At the end of the month use the weekly trackers to sum of the totals for the month.
Receipt Method
Using receipts is a good way to keep track of your spending, but it does have a very big limitation. Everyone who is spending must keep the receipts. You will need to write all of the information on each receipt. If you don’t get a receipt you will need to create your own receipt. At the end of the week or month, you can sort the receipts into categories and sum up the total.
Spreadsheet Method
If you have a computer, you can use it to help track spending. You can create your own expense sheets and tracking system by using a basic computer spreadsheet program. You can design your own or go to the internet and find different spreadsheets made by others.
Computer software programs method
You can also purchase or use a free software program designed specifically for personal finance. These software programs will do a lot more for you than just track spending. They will automatically upload all transactions from your accounts, provide graphs to help you understand your finances and many other things. There are really two types of programs; hosted solutions and local solutions. A hosted solution is one that stores all of your information on their side, whereas the local solution you will store all of your information on your computer. There are three programs that I like to use; Mint.com, Mvelopes and Quicken. Since each person has their own preference, you can try them out yourself and see if one of them works for you.
What is Cash Flow?
Today we will discuss cash flow. Before we do that we need to review your spending plan. Your spending plan has two main parts: income and expenses. We do break them down in the spending plan, but let’s keep it simple today. Cash flow can be positive or negative. Positive cash flow means that you have more income than expenses. This is a very good thing. Negative cash flow means that you have mo...
Creating Your Spending Plan
Up to this point, you should have been tracking all of your expenses and putting them into categories for your spending plan. In this post, we are going to break down your spending, look at your cash flow and spending ratio recommendations. The first part of your spending plan is your income. You need to start off with your gross income. This is all of your income without any deductions. Make s...
Spending Plan Basics
A spending plan is often referred to as a budget. Even though most people think of cutting costs or penny pinching when they hear budget, it is a valuable tool that does not need to have a negative feeling for you. The spending plan is a system for how you spend your money. The spending plan should be viewed as a positive tool that helps you plan and achieve your long-term financial goals. It w...
