Our preference is to use the term “spending plan” in lieu of “budget.” Some people may say it’s a matter of semantics – which is true. But you have to admit, “spending plan” sounds much more appealing than “budget” – right? Words have a way of influencing our emotions. Why not use words with a positive connotation, especially when we are talking about money?
In establishing your spending plan, here are 5 easy steps:
1. Know your income – include alimony, child support, investment income, etc. If your career is commission-based, estimate your income on the lower-end – it’s better to be conservative when developing your spending plan.
2. Write down how you spend money. Look at your previous year credit card statements and bank statements. If you use Quicken, you can easily run a report. Make sure you have an expense line for contributions to your savings (i.e., pay yourself first).
3. Identify which expenses can be reduced. We know it’s hard to separate needs from wants but it is necessary. When reviewing each expense line, ask yourself “Is there a way to reduce this expense?” If yes, then determine how much you can reduce it. Key areas our clients have reduced expenses in are food/dining out, clothing, entertainment and vacations.
4. Calculate your net income by subtracting your expenses from your income (income – expenses = net income). Your net income should be a positive number. If you calculate a negative number then you need to reduce your expenses in order to live within your means.
5. Track your actual spending with your spending plan at a minimum every three months. We suggest looking at your spending plan on March 30, June 30, September 30 and December 31. If you find yourself overspending, then adjust what you are doing.
Contact us to help you develop a spending plan. Also, follow us on Twitter to receive tweets on personal finance.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Her firm bridges the gap between financial planning and coaching. As a Transition Consultant, she offers sage advice in all aspects of life – financial, personal and professional. Niv does not manage money and does not sell financial products. Her services include spending plan development, divorce financial review, life strategy and professional progression. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me’.”