The basic formula is to spend less and save more. By doing this, you will gradually increase your net worth.
Many of us have developed a habit of either spending everything we earn or, in many cases, more than we earn. So, how do we start to change the money habits of a lifetime? One way is to create a spending plan…
The idea of making a budget and tracking expenditure can sound like a boring task but it doesn’t have to be.
A spending plan, sounds so much more appealing than the word ‘budget’ and, by taking the time to create one, it really will help you to make smart decisions with your money.
By keeping an eye on what you’re spending, you can spend without worrying because you know the important stuff is taken care of.
How to Create a Spending Plan in 4 Easy Steps
So, what do you need to do?
Start to track your expenditure and by track I mean absolutely everything… This includes the little incidentals, the coffees, the takeaways, the impromptu lunches… Everything.
There are two types of expenditure: Fixed and variable.
Fixed Spending: This is your mortgage or rent, utilities, council tax, car payments etc. It’s the things you have to pay every month, and it’s usually pretty much fixed.
Variable Spending: These are the things that change from month to month, which include groceries, dining out, household spending, birthdays, going out, clothes etc.
The uncomfortable truth is that many of us waste money on things that are not in alignment with our values.
Once you’ve started to really pay attention to your spending, you’ll gradually start to uncover where your priorities lie! Or, it’ll highlight something else… where you’ve been wasting money…
Just because you’ve been spending money on something, it doesn’t automatically make it a priority.
So, it’s really important to identify your financial priorities and assess whether your spending is in alignment with:
- Your values; and
- Your financial goals.
When you have an understanding of your values i.e. the things that are truly important to you, and the financial goals that are aligned with those values, then you can start to think about putting a portion of your regular income towards meeting those goals.
Generally, financial goals fall into 3 categories… short, medium and long term.
- Short term (up to 5 years) – this is for things like a new car, a holiday or perhaps an amount of money set aside for an unexpected expense;
- Medium term (5-10 years) – this could be for things like children’s school fees, savings for a child’s wedding or a once in a lifetime holiday;
- Long term (10 years plus) – again children’s university fees could be lumped into this category, as could retirement savings.
The plan is then to take your monthly income and allocate the right amount in each pot to ensure you will meet each of your financial goals.
Whatever you have left is the amount you can allocate towards your variable expenditure.
Once you have your amounts allocated, providing you stay within your spending plan, you will be increasing your net worth.
To keep on top of this, use one debit card or credit card for all of your variable expenditure so that you can keep an eye on your spending throughout the month.
You can make your savings automatic by putting in place a standing order. This will make sure the money earmarked for your financial goals never hits your bank account, helping you to resist the urge to spend it!
4. What Can You Do Differently?
Now that you have a good handle on your monthly variable expenses, you can really start to notice whether your spending is in line with your priorities.
If it isn’t, pick one small thing you can consciously start to change to help you spend less and save more over time.
If looking at all of this feels uncomfortable, that is exactly why you should be doing it. If you aren’t currently happy with the way your finances are, you need to do something differently and that’s likely to be the opposite of what you would normally do.
Give it a go and also know that you don’t have to do this alone… Get some help, from people and money experts who can help, if you feel you need some support, to keep you on track.
Have you created a spending plan and stuck to it? Do you feel your financial goals are not aligned with your financial reality? Share with us, we’d love to hear from you!
Image courtesy of Stuart Miles @ Freedigitalimages
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