The Importance of Spending Plans
By Kevin Gibbons
You wouldn’t take a trip without a map, would you?
Yes, sometimes I will jump in a car and “explore,” but in that case, the goal is clearly the journey, not the destination. Most of the time I am actually trying to get somewhere specific.
You need a plan on how to get to your destination, understanding how long the trip will take, where to stop for gas, food and relief; what are the best roads to take, what is the most efficient route.
True, you could just jump in your car and “navigate by successive approximations.” But you would probably arrive much later and spend more on gas and food (and maybe have to make a few emergency pitstops) along the way.
Likewise, some of us can get through life without a plan, reacting to what life throws at us and dealing with things on an ad hoc basis. But a plan can get us out in front of life, so we are acting instead of reacting. Instead of devoting all that brain power and resources to dealing with emergencies, with a plan, we can use those resources more efficiently and have more available for other things, like improving and enjoying our lives.
There are different types of plans people can have: “life plans,” educational plans, career plans, financial plans, etc. Today, I want to talk specifically about Spending Plans, what they are, why they are important and how to create and use one.
What Is a Spending Plan?
People often ask us what the difference is between a Spending Plan and a Budget. Practically, nothing. Both look at how much money you have, what your expenses are and how you are going to spend your money to accomplish your goals. From a lifestyle/emotional standpoint though, they are very different. Most people view a Budget as a restraint. “How do I stay within my budget?” “We have to budget to make sure we spend within our means.” “Blowing the budget” is a bad thing.
At The Savvy Life, we look at Spending Plans as the enabler that allows you to spend your money as you want. By having a plan, you have permission to spend, providing for your long-term financial needs while still enjoying today. Yes, this is largely psychological, but we have found it to be an important mindset in order for clients to be successful in managing their daily cash flow.
A Spending Plan is exactly what it sounds like. It is the plan for how you are going to spend your money. It looks at your income, your financial obligations and your financial wants in a twelve-month window and gives you a road map for reconciling them all. While it has provisions for setting aside money for your long-term goals, the Spending Plan does not cover how you are investing or managing that money. We leave that to the professional Financial Advisors and Planners. It does, however, consider most of the aspects of your lifestyle.
Why Are Spending Plans Important?
We have learned that money affects everything. It affects where we live, what we eat, how we dress and what we do with our free time, what we can give back to our community. How much we spend in one area directly affects how much money we have left to spend in another area. Without a clear plan, we are forced to either react to our environment or continually make “in the moment” decisions. A Spending Plan marks out the path for us to meet our financial obligations and achieve our lifestyle goals.
A Spending Plan is a key to leading a purposeful life, where you are making decisions and taking action with the intention of achieving specific goals and leading the life you want to live rather than simply responding to your surroundings.
How To Create and Use a Spending Plan
The most important thing to keep in mind when creating a Spending Plan is that it has to be simple, or you won’t use it. There are many budgeting apps out there, but for many people, they are too complicated, or too rigid in their set ups. Many people start using them and then abandon them after several months because they are just too cumbersome or don’t do what the people want.
A Spending Plan can be created in a simple spreadsheet such as Excel, Google Sheets or OpenOffice Calc.
It can be set up many different ways, but the fundamentals needed are:
1. Your Income
How much money do you have coming in and when?
Consider only your net “take-home” income. This is how much money you actually have to spend each month.
Make sure to account for irregular income, such as bonuses, tax refunds, etc.
Tip:
If you get paid bi-weekly, you will receive 3 paychecks in two months of the year. When setting up your monthly income and expenses, just consider 2 paychecks/month.
Treat the other 2 paychecks as irregular income. (If you just divide your annual salary by 12, you will be inflating your monthly pay for most months.)
2. Your Financial Obligations (or Essential Expenses)
These are the bills you have to pay to provide for your necessities (rent or mortgage, groceries, gas or transit fees).
Also include your long-term and emergency savings.
3. Your Discretionary Spending (or Lifestyle Expenses)
These are the fun things, the things that you want to spend on (dining out, vacations, entertainment, etc.)
Build your plan by matching up your Income and Expenses. You are looking for a “zero-sum” solution, where your expenses match your income. “But shouldn’t I spend LESS than I make?” Yes, you should. But you should also have a purpose for all the money you are saving. Those savings should be swept every month into one of your categories (Emergency, Long Term, Vacation, New Car, New Computer, etc.) If your plan shows you spending less than you make, congratulations! Put the extra towards a purpose of your choosing (increase your long-term wealth building, save for a short term purchase, use it for philanthropy).
If your plan shows your expenses are greater than your income then look at how you can either increase your income or decrease your spending. This is not always easy to fix, but at least you now know where you stand. That knowledge is a crucial first step.
Tips:
Your Spending Plan is only as good as how complete it is. Look at all your expenses from last year and create categories to cover the ones you expect to have for this year. Look at your bank statements, credit card records and other payment records (Venmo, PayPal, ApplePay, etc.) to get the most complete information.
Most people can do a pretty good job of tracking and planning for the income and expenses that recur every month. It is the intermittent expenses, like vacations, car registration, taxes and insurance that sneak up on them. Make sure you include these once-per-year or quarterly events in your plan.
Include when these expenses will occur and what your plan is to collect the necessary funds (are you going to set aside a certain amount every month, or use an income windfall to cover them?).
Create your Spending Plan to cover a 12-month time period and review it every 3 months, as your situation may change.
For some people, simply getting the clarity to see these numbers on a spreadsheet or piece of paper is all they need to confirm that they are indeed living purposefully and spending on the things that are important to them.
For others, this is just the first step. Next comes identifying the areas where they need to make changes and how to make those changes. If you are struggling either figuring out how much you are and should be spending, or what changes you need and how to make them, give us a call to see if one of our Spending Plan Programs is right for you.
Kevin Gibbons is a Cash Flow Planning Expert, the Vice President of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 625 individuals and families to create Spending Plans.
To learn about how Kevin and Melissa work with clients to create Spending Plans, visit The Savvy Life’s Home Page. If you’d like to learn about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page
