After 20 years of marriage and military service, my family is doing OK financially. We pay our bills each month, we don’t have non-mortgage debt, and save around 20% of our income for retirement. However, that doesn’t mean that there isn’t room for improvement. I know we spend more than necessary, and we need to get it under control.
The only effective way to get your spending under control is to plan it before you do it. Which means making a spending plan, or a budget. I know that some people have a strong negative reaction when they hear the word budget, which is why I like to use the phrase spending plan. Whatever you call it, it is the same thing: a plan for where you will spend your money.
There are a million ways to implement a spending plan: you can use an online system, you can use the envelope system, you can do it in your head (I don’t recommend this), or you can make charts, or you could paint it on your walls. It doesn’t really matter what method you use for your spending plan. The important part is that you do it.
Though you can use a wide variety of different methods to keep track of your spending plan, the steps are very similar.
Selecting Your Categories
First, you need to make a list of the major spending categories for your family. The big three are usually housing (rent, utilities, insurance, taxes), food, and transportation (car payment, insurance, fuel, parking). After that, you’ll find more variety between families. Common categories include child care, beer/alcohol, entertainment, clothing, memberships, iTunes/Amazon media purchases, hair cuts, dry cleaning. There are plenty more possibilities. Most people find that checking their bank statements helps to figure out where their money is going. Don’t get too hung up on this step. You can adjust later if you discover something that you’ve forgotten.
Guesstimate Your Amounts
Next to each category, write your best estimate of the amount that you spend each month. Once you’ve done that, see how the total compares with your income. This is where it can get a little tricky. Most commonly, people under-estimate their spending. I know that I do! If your calculations say that you have an extra $1,000 each month, and you have no savings at all, then you’ve missed some things. We aren’t trying to focus on where your money has gone in the past, but it is helpful for planning the future. If you forget the $5 you spend on beef jerky a couple of times a week, you’ll never find balance.
Once you’ve estimated how much you’ve spent in the past, try to adjust those numbers to represent what you’d like to spend in the future. Please start by putting aside some money in an emergency fund. Then, add in the big expenses of housing, food and transportation. Think of ways to cut a little bit off of each category. Don’t forget non-monthly expenses, such as car maintenance and new shoes! Finally, put in all the smaller items. Allow about 10% cushion at the end for all the things you’ve forgotten. Add them all up and make sure you are staying under your income.
Implementing The Plan
Once you have a plan, you’ll need to use your preferred method to keep an eye on your spending. When we were first married, with few spending needs, it was easy for me to keep track on a single sheet of paper. Now that we’re at the grocery store every few days and the kids are forever needing new shoes and poster board and saxophone reeds, our spending is harder to track. We’ve done the envelope system, and it worked, but I don’t like carrying around lots of cash and, at the moment, we’re living in two different currencies. For several years, I used Mary Hunt’s freedom account system, as explained in Debt-Proof Living. It was highly effective, but also fairly time-consuming. I recommend everyone try that system for a while because it is highly effective in identifying your non-monthly expenses. You can also use an online program like You Need A Budget or Mint.
Sticking with it is the hardest part, regardless of what system you are using. Your system might require a few minutes a week or a half-hour every couple of days. Whatever you’ve decided to do, just do it! I find it helpful if I have a goal and visual cues, but I know that isn’t for everyone.
Seeing The Results
If you take these steps, and you stick with it, I guarantee that you will see positive results within a few months. You’ll be more in control of your money and you’ll either be paying off debt or building up savings.
Join me as I get back to basics and build a spending plan for 2014. We can succeed together!