Tuesday, March 17, 2009

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?

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