Take Control of Your Life by Creating a Spending Plan

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Do you know the monthly cost of your insurance? What about your cell phone bill? Here's a stumper. How much money can you blow on entertainment? If not, then why? If you were managing a business, wouldn't it be important to know where all your money was going? Personal finance is no different. If you don't have a plan of how you intend to spend your money each month then I'm calling you out as being asleep at the wheel. 

I've written many times that getting ahead and creating financial independence isn't about making more money at your job, it's done by effectively managing what you already have. You can't accomplish anything great while on autopilot. You need a complete view of what you spend and what you take in each month. Businesses call this a statement of cash flows. Tremendous resources are spent understanding and tracking every penny in a business because they understand how vital it is to their success to plan how they will spend money. The spending plan becomes your control tower guiding you on your journey and helping to make sure that you reach your destination. 

To start, you need to get organized. Luckily banks make this very easy by providing monthly statements. You can use these statements to check how much you spend on each recurring item in your life. Use our Expense Summary Worksheet to sum and categorize all your cash outflows. Pay special attention to those items which meet your basic needs. Next you'll need to go through each expense to decide if it's a necessity or a not. This doesn't mean you can't spend money on it, but it does identify the places you need to spend money to survive. 

Once you've collected your data, complete and prioritize your financial goals.Now that you know where you are, you need to chart a destination. Next you'll create your flight plan by deciding how each dollar you spend relates to your goals. If you spend a dollar that doesn't help you achieve one of your priorities then that dollar is part of your disposable income. Subtracting what you need to survive from what you earn will give you the amount you have available to achieve your goals. Once you've charted exactly where you plan to save and spend your money in ways that will support each leg of your journey, the remainder is disposable. You can use this money in any way you like.

Don't confuse disposable income with entertainment. You should have a portion of your money which you plan to spend on entertainment. Review your spending plan every month. Track your progress to make sure you stay on course and review it with your spouse. You'll want to also review this with your financial advisor at least once a year. The air traffic controls that you've put into place will help you stay on course, but just like a real control tower, they require constant monitoring. Once you have implemented a system in your life, it becomes part of who. It only takes 21 days to begin a new habit. Once you've made planning your financial life a habit, you'll see results. Send us a post card when you get there. We'd love to hear about how you're doing.