Many people know what a budget is but, just like a diet, many of us don’t want to do it. So let me tell you about a spending plan instead. It doesn’t restrict your spending, but instead, it helps you plan where you want your money to go and track where your money went.
I like to use a spending plan because it helps me consider my upcoming income and expenses before the month even starts and then I’m able to reconcile what I actually spent with what I thought I would spend. I use this exercise with both my students and clients and have found it to be very successful over the course of several years. The key part of this exercise is projecting where you want/think your money will go followed by tracking it. It’s a simple 3 step process:
Step 1: Preplanning
First of all, write down your anticipated income and expenses before the month even begins. When I say income, I mean specifically your net income — meaning after taxes. This is the amount that goes into your checking account and that you actually are able to spend (not gross income which means before taxes and before many of your employer benefits are taken out).
On the expense side, write down your fixed and variable expenses anticipated for the month. Oftentimes, it’s easy to fill in the fixed expenses, but when it comes to variable expenses, this becomes more challenging because you might not know what you will spend and that’s okay. Give a good guess and keep moving forward. The tracking part will tell you what you actually spend so don’t get too caught up on getting this exactly right your first time around.
Step 2: Tracking
The next part is tracking the actual expenses. Now how you chose to track is up to you; find a method that works best for you. It doesn’t matter whether you spent the money on a credit card, debit card, check, cash, etc.; just make sure you keep track of everything you spend throughout the month.
Some individuals like to keep receipts and write down at the end of each week where their money went. Others like to use an app or a spreadsheet while some just like writing it down on paper (if you are an electronic spreadsheet or paper user, we have our own versions for you to use below). The most important part is that you actually track everything! I highly recommend that you do this at least once a week and don’t wait until the end of the month. If you’re doing it at least on a weekly basis, you’ll be able to capture the exact type of spending it is and categorize it correctly.
One more note on the tracking side, make sure to NOT have an “Amazon, Target, Shopping or Other” category. You need to actually categorize what you purchased so that you know exactly where your money went. Amazon just tells you where your money went NOT what it went towards. If you buy several categories of items at a store, simply categorize them into the correct bucket to give you a true sense of what you are actually purchasing.
Step 3: Reconciling & Reflecting
Once you’ve captured everything at the end of the month, reconcile and see where you were right on with what you thought you were going to spend and where there may be some discrepancies. When you do this, you’ll see the differences and compare what you want to keep and what you want to improve.
As a teacher, I never tell my students where to spend or not spend their money. It’s through this last step of self-reflection, that you are able to review and compare yourself and make your own changes as you see fit. I highly encourage doing this with your spouse or partner so that you work together on this as a family and reflect on it to decide what you want to do in the future and how best to accomplish the goal.
I have found that when clients or students make their own financial choices on spending according to their income, they feel more engaged and responsive to the changing needs of their personal and family financial situation. Without ever saying anything, I am able to watch individuals personally and collectively as a family grow and develop by simply knowing where their money went.
Finally, my last recommendation is to follow the spending for at least 3 months to give you a better idea in case one month is out of sorts from the others. I often have individuals tell me “this month is so different because of XYZ”, but in actuality, every month is a little bit different than the month before. You will become better at this as you do this over time.
Here is our version of a spending plan (click here to download the CFM Spending Plan Worksheet, or click here to download the CFM Handwritten Budget). Keep in mind there is no right way or wrong way to complete this project. The most important thing is that you are learning about your own habits and your own spending over time. This will help you project for the future of what you make and spend in set time periods.
I have found that doing this exercise and, most importantly, reflecting on it afterward has helped many people make lifestyle changes and choices without feeling restricted or impaired. I hope this method helps you focus on what your priorities are and make sure that you’re spending in agreement with these priorities. My favorite part of this whole project is that it’s really up to you. It’s not for anyone else to judge or criticize or say you’re wrong, but it’s a real exercise in making choices.
I’d love to hear how this exercise goes for you and your family and I especially love to hear the changes you are making based on your spending plan. Reach out to us and tell us how you’re doing. We’re here to help you and cheer you along the way.