Do You Have a Spending Plan?
Unless you’ve been living in a cave on a remote island in the Pacific (one without wireless access), you have probably heard a lot of talk among various parties trying to agree on a sustainable spending plan—and I am not talking about your friends or neighbors next door, but the state of Pennsylvania as well as good ol’ Uncle Sam. Not to get too political, but both sides are arguing for their right to certain expenditures. One party makes the point of detailing the need for this or that program, and the other shoots it down in favor of their own agenda. It sounds very much like a conversation that I have regularly with my husband.
It usually starts with the cable bill, which seems to increase exponentially with every statement. What we once budgeted for no more than $50.00 is now over $200.00 a month. Those HDTV signals, cable boxes, and on-demand movies add up. Tack onto that an essential that was not even on our list when we bought our home—the internet. This discussion usually leads to a rather animated debate about our overall monthly expenses and ways to “cut the pork.” And alas, much like Congress, we seem to disagree on what exactly fits into that category. Although this process can be nerve racking, the end result is a renewed sense of feeling more in control of how we are spending our money.
Creating a realistic spending plan (a.k.a. “a budget”) requires a little preparation. The first step is developing an accurate listing of your income and expenses. This is not the most exciting assignment, but it is vital to keeping your household finances in order; it is the foundation on which your larger plan is built. Ultimately, the end result will show you where your money is coming from, how much is there, and where it is all going. The best way to accomplish this is to list all your sources of income for the month as well as your monthly expenses. This information can be obtained through a review of your financial statements as well as a review of your monthly bills.
When you list your expenses, break them into two categories: fixed and variable. The fixed expenses are those such as a mortgage, car payments, or electric bill. These rarely change and are required living expenses. The variable category consists of those that can change from month to month, including gasoline, entertainment, eating out, and gifts. The variable expenses will be important to review when adjustments in your spending need to be made.
It is important to review your budget on a regular basis to make sure you are staying on track. After the first month, take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve. (Here we might digress into a chat about needs vs. wants, but that is a topic for another article.) If you are experiencing a transition in your personal and/or financial life, it is more important than ever to complete this exercise; it will help you to stay in front of any financial snags.
A big concern for women taking control of their financial lives is getting on a regular schedule of bill paying and budget review. Although there are great tools on-line to automate your bill paying, it is a good idea to review the monthly statement in detail. This not only gets you into the habit of looking at your expenses but also creates a visual reminder of what those Jimmy Choos really mean in financial terms. It is okay to treat yourself on occasion, but you might have to give up that massage and manicure one month to stay on financial track.
A good idea to stay on track is to set one place, one day, and one time to pay your bills each week. As the statements and bills come in each day, put them into a folder. Then each week—perhaps on a Sunday night after dinner—sit down and review your statements. Any bills that are due that coming week should be paid. Remember to allow enough time for the check to reach its destination. File the statements and bills away in case you need to refer to them in the future.
To reduce your anxiety about your financial future, follow and regularly review your spending plan; it is vital to keeping your financial “house” in order. The same rules apply if you make $40,000 a year or $200,000. Spend less than you earn, and save the difference. By following your spending plan and using your creativity and self-control to make any needed changes, you will feel more in control of both your financial and personal life.
Story by Loretta Hutchinson MA, NCC, CDFA