Create A Spending Plan Instead of a Budget

BUDGET. Does that word depress you? Does it conjure up images of deprivation? I think it does for most people. But why? I have some ideas as to what people think about budgets. First, it’s a lot of work to make one. Once you do, all it does is tell you what you can’t do. You want a new car, but it “isn’t in the budget”. So, no new car. You want to go to Hawaii, but it too “isn’t in the budget”. So, it’s another trip to Joe’s Family Campground. It feels like you’re being punished for trying to plan.

It doesn’t have to be that way. Money management shouldn’t feel like punishment. But it does require a mental frame-shift. First, let’s banish the word “budget”. Instead, let’s use “Spending Plan” (Step 1 of the frame-shift). It may seem trivial, but it’s not. A Spending Plan is something that you control. How you spend your money is your choice. However, it’s the word “Plan” that is the key. It’s being deliberate about how you spend your money (Step 2). Let’s face it, we can spend whatever money we have. There are always more needs, wants, “just have to haves” than money. That’s normal. So, start by putting out, in plain sight, all your financial needs, desires, and obligations. All the ways you could spend your money. Step 3 involves Priorities. You need to ask, “What are our priorities in life?” “What are we trying to accomplish?” Is it saving for college, Hawaii, starting a business, or helping your aging parents live comfortably? The key is, they need to be your priorities. You need to believe in them. Because as you go back through that spending list, you need to ask which expenditures support your priorities and which don’t. Be honest. A new bedroom set might be nice, but will it help you save for college or your dream boat? If not, then why do it?

Let’s review. You list all the things you’d like to spend money on, you determine your priorities, and you spend based on those priorities. Confining? Yes in that you probably can’t buy or do everything. But no in that you’ve consciously chosen to spend your money on the highest priorities in your life. You hopefully won’t someday ask yourself, “Why do we own all this stuff but never had the money to travel or to start that business?”. Step 4 is critically important. It is accepting that a Spending Plan can be, yes, liberating. Let’s say you’ve developed a spending plan for the year and you’ve been following it. Out of the blue comes an opportunity. Something not part of your Spending Plan. Do you say “yes” or “no”? Since you are aware of your priorities, you simply ask yourself, “Is this opportunity more desirable than something else already in the Plan?” Say it costs $1,000. Are there things in your Plan, totaling $1,000, which you’d give up for this new opportunity? If not, the new opportunity isn’t a high enough priority. If so, you’ve improved your life by substituting a better opportunity. Financially it’s a wash. Without a Spending Plan this situation unfolds very differently. Some will simply grab it, not knowing whether they can afford it. Others will assume they can’t and turn it down automatically. That’s sad. New opportunities should be seen as that- opportunities. A Spending Plan allows you to objectively evaluate choices based on your priorities.

I’d like to leave you with a few tips for developing and maintaining a Spending Plan. First, track your spending. Quicken does this well on your computer, as does good old paper and pen. If you prefer an online tool, www.mint.com is a free option. Next, get everyone involved. The most financially successful couples I’ve seen approach their finances jointly. If one of you is “just not good with money”, you can keep track of where your money is spent. The other person can enter it into Quicken. My third tip is to limit impulse spending. Studies show credit cards increase spending, so consider using debit cards or cash. Visit the ATM once a week. Figure your needs, get the money, make it last. One of the biggest surprises for my clients is how much they spend at the grocery store. They are impulse spending traps. Go only once a week, with a list, and don’t go hungry. Finally, acknowledge and plan for the large, occasional expenses that can occur. Some, like auto insurance premiums or Christmas expenses, might occur only once or twice a year. Others occur more sporadically (auto or home repair). But you want to plan for them by putting money aside each month. When they do occur you’ll be ready. Imagine, no Christmas bills in January.

I hope you’ll consider trying a Spending Plan. It can help you to spend wisely, flexibly, and in alignment with your priorities. Chances are you’ll be surprised how much you can accomplish with what you already have.