Budgeting and Spending Plan. Simple. Effective. Mandatory.
Creating a Spending Plan (a.k.a. Budget) can be a scary word for many people. Most of us hate it. It shows us how much money we've wasted, how little we have left, and it can leave us with feelings of helplessness and hopelessness. But the spending plan is one of the critical elements of turning your finances around. It's practically a mandatory item if you want to turn your finances around. However, it doesn't have to be difficult. It can be simple yet effective.lower-income
Some people believe you have to budget every penny. That's not necessarily true. Although planning how to spend every penny can be a big help, it can also be a hindrance. All you really need to do is to get your money flowing in the right direction. Once you get your money flowing into the right things, your financial future can start looking brighter.
Simple and Effective Budget
I prefer a simpler way of budgeting. First, I like to build my budget out into major categories. Super categories. By breaking my budget into four major components, I know that my life is in balance and money is flowing into the right places and in the right amounts. Think of it as a gauge or meter on your financial life and your goal is to keep all of the super categories in the green.
Living Money - money you need to live. This includes your rent our house payment, electricity, food, water, car payment, gas, insurance, clothing, phone, etc. You want to have visibility on your living money so that you can keep your lifestyle in check. Quite a few people allow their living money to get out of control and later wonder where all their money went. It's easy to let life expense creep as your income goes up.
Wealth Money - money you set aside to build wealth for you and your family. This includes investments like stocks, bonds, mutual funds, real estate, REITs, gold, silver, etc. Your primary home is a unique type of investment in that it appreciates (goes up in value), but it doesn't create cash flow. During the payoff period, we include your home as part of your wealth money as well. If you pay extra on your home, count it as wealth money. Primary homes usually don't have the same growth rate as a stock market investment. This is the spending plan category you want to max out! Many financial teachers tell you to invest 15% of your income into retirement. I want you to throw that number out the window. I want you to think about increasing that number. Can you get it to 20%? 30%? 40%? 50%? I like hard numbers. If you're new to investing or just getting your feet wet, set a hard goal for your investing with $10,000 a year as your minimum. As you learn to manage your money better, try increasing that hard number to $20,000, $30,000 and beyond. What's your limit?
Play Money - money you spend to enjoy life. It's a flexible spending group which means you don't have to spend it. It's optional. Money spent on things like movies, Netflix, Amazon Prime, gym memberships, vacations, ski trips, and whatever else you can dream up. We love to play, but don't let your play money get out of control!
Others Money - money you give away to other people. I believe our financial goals in life should include giving to others and helping people who need it. As we learn to manage our money more effectively and accumulate wealth, we have a unique opportunity to leave a bigger positive impact on the world.
Budgeting/Spending Plan Exercise
So now you're ready to tackle the spending plan. Just remember that like anything you do for the first time, it's difficult. After doing it a few times, you'll get better and it will become easier. Stick with it and you'll quickly see positive results in your financial future.
Start by entering your monthly and annual income in the center bubble. I want you to see how much money you have to work with each month and each year. Every dollar is precious. Seeing it all in once place can help you get a bigger picture of your money and help inspire you to manage it better.
After you enter your income, start filling in the blanks in each category. Start by just listing things out, then you can fill out the amounts later. It's often easier to think about what you spend money on than the amounts you actually spent.
Fill in the Amounts
After building a good list of items, start working to fill in the amounts. Take your time. It's best to refer back to your checking account for this information as our memories can often be wrong. You may remember something costing $100 a month when it actually costs $300 a month. A few of those mistakes will really throw your spending plan into chaos.
After getting a rough draft of how you're spending your money, it's time to calculate how much you are spending in each category. Your goal is to keep everything in balance. Keep your living and play money as low as possible, your others money at a reasonable level, and max out your wealth money...within reason.
Many times people living paycheck to paycheck are spending way too much in living and play money, a fair amount in others money and too little if anything in wealth money.
The goal is to give you the big picture of your monthly finances. If your wealth money is low to 0, you can't become a millionaire. Fix it. Do you need to change your spending habits or do you need to make more money? The great news is, both of those problems are fixable.
You may think you don't make enough money to become a millionaire. Wrong. Anyone can become a millionaire. There are over 10 million millionaire households in America. That a little over 1 out of every 10. Many of them come from poverty or lower-income families like me. Stop making excuses. Get your money flowing in the right direction. Set a clear millionaire goal, and structure your spending plan to accomplish your goal. It won't be long before you realize you've made some great progress.