Taking charge of your spending is instrumental to creating a solid financial foundation
During times of uncertainty and fear we sometimes can get stuck in a rut of confusion and may be tempted to abandon our financial plan. Sticking to a plan is more valuable now than ever and may involve getting back to basics.
The best way to take charge of your spending is to create a solid spending plan.
We all know how important it is to live within our means, but it is equally important that you are able to identify where your money is being spent. Creating a spending plan also helps you identify areas where you can potentially reallocate to fund your goals.
A spending plan is made up of different components. Here is a general overview of the four steps you can take to ensure you have all the components you’ll need:
- Gather all relevant documents.
- Understand where you are financially by calculating your net worth.
- Review your cash flow – what’s coming in and going out – to make sure your money is going where you want it to go. This part of your plan is often called the budget.
- Finally, use your budget to create monthly spending plan.
Gather All Relevant Documents
Before you can put a plan in place, you need to organize and understand your expenses, savings, debt, etc. You need to know exactly how much is coming in, how much is going out, and how much is left over.
The first step in this process is to gather all of your relevant documents (i.e. income, monthly bills, savings and investments, debt and assets).
Understand Where You Are Financially
The best way to understand where you are financially right now is by calculating your net worth and your current cash flow.
A Statement of Net Worth is a snapshot in time of your financial worth. Add up the value of your assets (everything you own) and subtract the value of your liabilities (everything you owe), and the result is your net worth.
Through good financial management, you should see this number grow over time. It’s a good idea to calculate your net worth annually or when there are major changes to what you own or owe.
• Net Worth = Assets – Liabilities
Cash Flow (Budget)
The Cash Flow Statement helps you identify what’s coming in and going out to make sure your money is going where you want it to go.
• Cash Flow (Budget) = Income – Expenses
One of the common mistakes that I see is individuals overlooking expenses. Expenses are one of three types: savings and investments (which is money you spend on yourself), living expenses, and debt payments.
If your bottom line shows a valid deficit, it’s time to take action. An action plan can help you balance your budget and improve your cash flow by finding ways to increase income, decrease living expenses and/or decrease indebtedness. It will also help you set short-and long-term financial goals.
If your bottom line is positive, congratulations! The excess cash flow can be used to fund your goals and dreams (i.e. increase savings or pay down debt).
Use Your Budget to Create a Monthly Spending Plan
Use your budget to create a monthly spending plan that will keep you on the path to achieving your financial goals.
A monthly spending plan helps your finances stay on track by comparing your actual monthly expenses to your budget. A good budgeting software program can be helpful to automatically track your expenses.
Not only is it important to take the time to work through each of the components so you have a starting point, but it is also important to include your spouse or significant other in this process. You both should have an understanding of the family finances and be able to set goals as a couple.
A good spending plan can help you identify and stop “spending leaks” which is instrumental in creating a solid financial plan.
If you are feeling “stuck” or you would like to learn more about your relationship with money, take the “Money Type Quiz”. Only you see the results.