We’ve developed many financial plans over the years for our clients, and there is no doubt that cash flow is a critical component to just about everyone’s financial plan. What we mean by “cash flow” is the comparison of income and expenses – money in vs. money out. We wrote more about cash flow planning here. This is the most important planning you can do and the biggest key to success with your personal cash flow is to have a spending plan. A spending plan will help keep you on track to achieve your financial goals.
We all know that having a spending plan is a good idea, but many people fail to actually put this into practice. Having a spending plan is like eating vegetables. We all know we should do it, but we often don’t in the end. It’s difficult to know how to even start.
Well here’s a little help. The first step should be to figure out what you’re currently spending. It’s hard to make any sort of realistic spending plan if you’re not even sure where your paycheck is currently going. To do this, start a spending diary of sorts for the next month. This will be the route to take if you spend a lot of cash. If all your spending is done with credit or debit cards, there are many available apps and computer software that can track your spending for you. We recommend checking out our own Purposeful Wealth Portal where you’ll be able to link your checking accounts and credit cards and the software will automatically track your transactions and break down your monthly expenses into categories. Other popular websites such as Mint, You Need a Budget, or Quicken can also be helpful tools to do this.
Once you’ve gathered a month’s worth of spending information, spend some time reviewing this collection of spending details thoroughly. Are you satisfied with how you spent your money? What can you cut back on? What do you wish you invested more in? This step can be pretty eye opening if you’ve never assessed your spending habits by the numbers before. At Guillaume & Freckman, we encourage an attitude of financial stewardship, so we believe an evaluation of how we direct our money is indicative of our priorities and reflective of what’s important to us.
Once you have a good idea of what your monthly expenses are, you can compare this amount to the amount of income you have each month. It’s at this point that you’ll have an idea as to whether or not your spending habits can be sustained while also achieving your other financial goals. If you are overspending (meaning your expenses top your income), you’ll need to review in detail your monthly expenses to see what adjustments need to be made in order to find a sustainable spending level.
On the other hand, if you have “excess income” (meaning your expenses are less than your income), you’ll know just how much you can reasonably save each month. Your saving and spending amounts are significant factors that will affect the development of your financial plan.
As you familiarize yourself with your expenses, you can begin to draft your spending plan. You’ll have a better idea of what you normally spend each month on certain items and you’ll be able to consider how much money you’d like to ideally allocate to different items each month on things like groceries, going out to eat, entertainment, etc. Once you’ve outlined the framework for how you’ll allocate your monthly expenses, you have built your spending plan!
Now that you have a plan, it’s time to execute. Having a sound spending plan requires ongoing attention. You should revisit your spending plan every month and evaluate how the previous month’s expenses compare against your spending plan. Your spending plan will serve as a point of reference as you track whether you are on pace to achieve your financial goals as the months go by. By utilizing the technology available to you, this does not take much time. It’s important to keep perspective of your long-term financial goals as you do this. Reviewing your spending every month will give you the opportunity to make the necessary adjustments going forward with your long-term financial plan in mind.