When you first start taking seriously how you manage your finances, putting together a spending plan (like a budget but much more effective) and actually sticking to it can seem like a rather daunting task. However, if you have a limited income or simply want to take greater control over your spending, it’s absolutely necessary to get the hang of it sooner than later.
So whether you’re a young adult or in middle age, here are some tips that can help you establish your first spending plan so you can get off onto the right foot:
- Create a history of the way you spent over the last 12 months. Determining your expenses is much harder than determining your income. To get a more accurate reading of how much you spend each month in certain categories, use your bank and credit card statements, purchasing receipts, entries in your check register, and so forth to see how you have spent money over the past 12 months. If you cannot create a full-year history, simply do the best you can with six or even three months of spending information. Looking at these expenses will be quite emotional and you may find yourself thinking, “why did I spend money on that?” This is good as it will help you make changes in your spending habits going forward. This kind of a history will give you exact reports of how much money you spent in categories like utilities, fuel, food, entertainment and more.
- Review your spending and set realistic goals. Once you’ve categorized your spending and reviewed how much you’re actually paying in each category, it’s time to determine whether you really need to be spending as much as you are in those categories. If you’re spending too much, what do you think is a realistic goal you can meet? Make this goal your spending amount for the next month.
- Create a spending category for savings. Be sure to include a category in your spending plan for the amount you intend to put into savings as an expense. That way, you are planning for it every month and it’s essentially a part of your paycheck you never actually see. Turning your savings into a routine part of your financial planning is a really helpful way to make sure you actually keep saving money in the long-term.
- Track your spending at the point of purchase and as you pay bills each month. Be sure to use a tracking tool (Money Mastery offers a free phone app tracker here) that allows you record at the time you make a purchase what you spent in a particular category. Then you can review how you did in staying within your spending amount for each category and how you may need to adjust your spending for the coming month to stay balanced. You’re not always going to perfectly hit your targets, and what is a reasonable target amount might change depending on changes in your life.
For more tips about getting started with creating an effective spending plan and how to manage and track that plan, get in touch with the experts at Money Mastery today!