30-Day Economic Stability Challenge: Creating a spending plan

Yesterday, I shared why I use a spending plan instead of a budget. But now that you know why you should have one doesn't mean you know how to create one.

I regularly send clients my own template for a spending plan, but here, I'll share how to make one of your own:

Step 1: Gather the tools.
You don't have to use a fancy budgeting program; you don't have to even know how to use Excel. What you do need is a little notebook like one you can get from Walgreens or another drug store and a pen.
Step 2: Track your spending for one month.
Here's the trick of tracking spending: Unless you have an encyclopedic brain--on which many of us in our busy lives can't afford to rely--you'll forget what you spend unless you bring that little notebook with you. Stash it in your purse or keep it in your pocket. Whatever you do, just try to remember to write down everything you spend and on what: lunch with an editor, toiletries, shoes, groceries. Who cares whether you used a credit card or cash for it. The important thing is to know how much you spent and on what.

Step 3: Trust that you won't be punished.
The biggest barrier to starting this process--which I've now done for two and a half years--was the fear that someone would see it and tell me I was spending my money wrong. I was afraid that what I wanted to spend money on was frivolous or that I should buy any luxury items until I was making more money. Turns out, I wasn't spending enough money on basic needs like household supplies and entertainment ($10 a month, I think many will agree, is not enough). Until I got that keeping track for a spending plan was different than keeping track for a budget, I wasn't willing to do it. I had too much shame.

Step 4: Do a tally.
At the end of the month, make a list of everything you spend your money on, and then start correlating things that go together. Everyone's line items will be different, but mine include:

• Food in
• Food out
• Entertainment
• Clothes
• Personal care
• Rent
• Health insurance
• Gym
• Web maintenance
• Printer ink
• Office supplies
• Taxes
• Internet

I also separate these categories out: one list for personal expenses and a second for business. Here's a hint: This kind of record keeping will make tax time hugely easier for you. When preparing my taxes this year, it only took me a few hours because everything was laid out in easy-to-understand categories.

Congratulations. You now have a spending plan. Those categories, whatever they are, are your spending categories. Don't worry if some of them were surprise expenses that aren't monthly--just create a "Surprise Expenses" category and stock it with that money. You'll be surprised as you keep this up how often you have surprise expenses--and how unsurprising they become after a while. You can add and change them at will, but this will give you a framework and help you see what you love spending money on.

Step 5: Round off.
Now that you know what you actually spend, round the numbers to whole numbers. I try to round off to the nearest five or 0. Remember that this is just an estimate, and you'll refine it as you use it more.

Step 6: Add it up.
You'll probably want to add this number up, and please feel free. But remember, the analogy between a budget and a diet holds true for this final number, too. Just like you aren't a numbe on a scale, you aren't a number in a spreadsheet, either. You may find that you spent less than you brought in last month, or you may find that you spent more. Just remember that it's just a number and it doesn't mean you're a bad person or bad business person if everything doesn't add up perfectly or if you're spending more than you're bringing in. Join the club. Many of us do that.

An income plan is quite different from a spending plan. Just stick with the spending plan for now.

Step 7: Share it with friends.
I know that sounds crazy. Who wants to share their financial state of the union with a friend? Many of us have a hard enough time talking about money with our loved ones and family. But it's important. How does it feel? Now's a good time to rally your support people and talk to them about your spending, what scares you about it and how you want to proceed. Whatever it brings up, be sure to share it. Keeping it in will make it that much harder to stick with the plan.

How do you track your spending?

30-Day Economic Stability Challenge: Budget vs. spending plan

In my experience personally and with other writers, one of the hardest things to do is keep track of our spending--which makes all the other tools useless. After all, we can't work toward putting 30 percent of out income toward cashflow or savings if we don't know how much we're making.

I know. I spent years drafting budgets in Excel, only to abandon them almost immediately. For me, a budget is like a diet--all about what you should be cutting out instead of what you get to eat. So a key to my financial solvency is to draft and follow a spending plan every month.

I'm not the first to talk about this. Lots of other bloggers and financial minds have covered this topic. And clearly I don't know what will work for you. But for me, a spending plan is the answer because I'll do it--and I won't do a budget. I've been keeping a spending plan and tracking my spending for about two and a half years now, and it's contributed greatly to my serenity by showing me where I'm spending my money and what I value. Plus, knowing how much I need to make based on spending gives me the motivation to earn more because I know what I'm getting for the money.

Here's what I love about a spending plan:

• It acknowledges that money is emotional. If I just look at a budget, I can see where I should spend my money--what would get me to one goal the fastest--but my experience with money is that I never have just one goal. Each financial decision is a juggling of a lot of wants, needs and guilt and desire. A budget doesn't have room for that. A spending plan gives me breathing room.
  
• It lets you have the things you love. A budget might tell you that the $4 frapaccino you buy every week on the way to a specific meeting is frivolous. But maybe that $4 coffee drink fills you with such joy and happiness, it's one of the bright spots of your week. If so, a spending plan lets you keep it while a budget would tell you to forgo it for some other, greater end. I do that with expensive hair products. I could get $4 shampoo at the grocery store, but my spending plan includes a considerable amount of money for the salon version because it's my one big splurge a month. I don't get my nails done, I don't shop at Bloomingdales. I treat my hair to a spa every time I wash it. It's worth it to me.
• It stops you from having a power struggle with yourself. I don't know about you, but a budget always made me feel like I was doing something wrong. If I were budgeting, I'd spend that money where I was supposed to (that diet thing again), but feel mad, resentful and guilty about not getting to have the fancy conditioner. Now that energy is freed up to earn the extra money I need to afford the fancy conditioner.
  
• It lets you want things. My spending plan also includes a number of so-called accruals--that is, things I can't afford now but that I want. Before using a spending plan, I always treated those things as luxuries, not realizing that some were literally necessary and others brought me joy. Now I can have accruals for things like a new computer as well as new boots. I don't have to do it right. I can just do it.
  
• It helps me prioritize. The great truism of money is that you can have anything you want but you can't have everything you want--at least not all at once. So I've had to sit down and figure out which thing I want first, or most. If it's a matter of saving for a computer or an ergonomic chair, a spending plan lets me put both on the list but then helps me see that I get to have one first. Which do I prefer?

Obviously, your mileage may vary. For those without such an emotional connection to money, a budget I'm sure would be fine.

Recently I sat down with a writer friend and helped him create a spending plan. He'd never had one because he thought he first had to increase his income. While increasing income is a noble goal, creating the spending plan actually gave him joy. He got to see that even on his small income, he could put a little away for reserves and even have some things he really wanted but didn't think he could afford, like accessories for his bike. It was great to watch the spending plan create some space and breathing room in him.

Tomorrow, I'll share how to create a spending plan.

Photo by Jeff Keen.