The first step to creating a spending plan is to assess your overall money flow—what’s coming in and what’s being spent. From that information, you can create a plan that will realistically guide you on your spending practices. Start by following the three procedures below.
- Determine the goal of your plan- Are you trying to pay off a loan? Are you trying to save for an upcoming trip? Or are you simply trying to live comfortably while avoiding debt?
- Calculate your overall income-Consider all the places you get money from each month such as a job, loans, parents, etc.
- List all your monthly expenses- Fixed expenses are those expenditures which remain at the same amount each month. This might be your rent or car payment. Meanwhile, variable expenses are those that fluctuate, like utilities or food.
Common Mistakes
- Forgetting an emergency fund- Just because you have a spending plan and abide by it doesn’t mean you are invulnerable to significant, surprise expenses. Allocate some money each month to build your emergency money pot. You’ll have greater peace of mind when your laptop needs replaced or you become unemployed.
- Not planning for unexpected expenses-Things come up—wedding parties, a night out, (speeding ticket!), etc. Set aside a bit each month for miscellaneous expenses. This acts as a cushion for some of the unpredicted bits of life.
- Failing to makepractical adjustments-You may need to alter your spending from time to time.For example, if you decide to not attend classes for a semester, you’ll need to make changes to your plan and choose what to do with the money you save.
- Over-complicating your financial trackings-Some people keep every receipt and track their spending to the penny. This is not necessary as it can make your spending plan more of a pain than a help. Clickhereto learn what records you need to keep and discover time-efficient organizational methods.
- Not checking your spending throughout the month- Ignoring your spending until the end of the month can create chaos. Like brushing your teeth or eating healthily, it is something you needto do regularly.
Tired of paper?
If you prefer your smartphone or laptop to a pencil and paper, then maybe you'd prefer budgeting through one of these cool apps. These applications can help you keep track of how much you're spending and where, eliminating the need to keep track of those grocery receipts forever (less paper!). These convenient apps can allow you to budget with the touch of a button and monitor your actual spending and saving habits.
Hyperbolic Discounting
Hyberbolic discounting refers to the human inclination to increasingly "discount" the value of a reward the longer the wait time is to receive the reward. In other words, we tend to value instant gratification more than a reward of the same value that lies far in the future. Moreover, we may even value a smaller reward now as greater than a more valuable reward that would be several years in the making. The problem with hyperbolic discounting is that it drives us to save less and put our long-term financial stability at risk. Make sure you keep the influence of hyperbolic discounting in mind as you create and implement your spending plan. Don't succumb to the temptation to spend a lot on unnecessary things. Don't indulge yourself so often or go into so much debt that you won't be able to live comfortably with your family later on in life.
Marshmallow Study
A Stanford University professor conducted an interesting experiment in the 1960s. He presented to young children a marshmallow and gave them a choice: eat the marshmallow immediately or, wait a few minutes and get another marshmallow to eat. Many of the children could not wait long enough to receive the second marshmallow. This is a great example of the human tendency of hyperbolic discounting. Be patient as you save for the future. Delaying the instant gratification of spending on whatever you want now can dramatically increase your financial comfort and security in later years.
Cash Flow Analysis
If you are wondering how close you are to the average spender in your financial situation or how you can improve your spending habits,makean appointment with us for a free cash flow analysis. We can help you better understand your budget and find ways to save even more.
