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Photo by 1blessedmomThe best way to succeed at eliminating debt and building wealth, without depriving yourself and your family of the things you want in life, is to approach your annual spending exactly as a successful business would. A business does not fly by the seat of its pants when it comes to spending money—at least the businesses that are around for a long time do not. I have worked for businesses that have literally spent themselves right out of business. So, I know firsthand that working without a structured spending plan and realistic financial goals is a prescription for failure for businesses and for your household. A family is really no different than a successful business. The day I started running my family’s spending with a business attitude things began to change drastically for the better. I felt I finally had a real grasp of where our hard-earned money was going before it actually went away.
You see, most people don’t realize they are having money problems until they are in serious trouble. By then it can be too late to do anything constructive to change the situation. Being able to see where your money needs to go, before you pay a single bill, will allow you to re-direct other spending to take care of the most important things first. The worst way to handle your family spending is to go through the month oblivious to what bills you are paying and how much you are spending. Then, once you get your bank statement and realize you don’t have as much in the bank as you thought, you try to recreate the month’s spending and deal with more bills and a lack of money at the end of the month. What if you get to the end of the month and you are out of money? This happens all too often for most families. This problem is so common, they write songs about it. Have you heard the country song, "Too Much Month at the End of the Money?"
I mention families quite often because I know the majority of my audience will be families. But, I want to be clear to my single friends who are reading this that you are actually in a better position to begin spending your way to wealth because you can make changes more easily. Also, you probably don’t have the expenditures on a weekly, monthly, and yearly basis that a family will have. On the other hand, while it is true that a single person can make changes more quickly than a married couple, single people are also in the paradoxically precarious position of having more discretionary income. If you do not have children in your household, you may have an additional $5,000 a year, or more, at your discretion, which you could easily throw away without proper, businesslike spending strategies and a realistic spending plan.
You do not need to have a degree in accounting to accomplish what I am talking about, as you will see. You can run your family spending on a pad of paper. The keys to success are planning, organization, and consistent record keeping, in addition to a commitment to the goal of building wealth for your family’s future. Planning is the most crucial aspect of creating a good spending plan and often the toughest part of the job. Getting started is difficult and, when it comes to taking a detailed look at your family spending habits, it can be painful as well. To plan well you must have honest information about the project you are planning. Since your spending is the subject, you’ve got to know the facts about everyone’s spending habits, including your own. When I first went through this exercise, I disliked looking at all the money we were spending. I could not believe it. It took writing everything down on paper and adding up all the bills and expenditures to realize we were not saving a penny. In fact, if things continued as they were going, we not only would have zero savings but would also actually go deeper and deeper into debt. This normally happens when people outspend their income. And there is no income you can’t outspend.
When you start outspending your income you start to borrow money from credit cards, banks and other sources, usually at very high interest rates. Once you start to do that, the fall into financial oblivion is accelerated. You find yourself trying to stretch the same income to pay all of your regular bills plus the added burden of interest. When I looked closely at our family spending, I expected to find lots of frivolous expenditures on things that we really did not need. But I was shocked to find that what we were buying was necessary. I mean, I don’t have to tell you that it costs a lot of money just to cover the basic essentials of life, let alone any luxury items. Most families are not failing financially because they are spending money on fancy cars and elegant wardrobes. The problem is they are overspending on every item they buy so there really is no money left over for any thoughtless splurges. And if this family does happen to save money on some purchases, the savings are soon lost to overspending as well.
Taking a very close look at your essential purchases and how much money will be needed to take care of those purchases on a monthly and annual basis will open your eyes to exactly how much money you will need to earn just to cover your expenses. This will also show you whether you will have anything left over for discretionary spending. My plan is for you to know all of this information before your year starts, not after you discover that you don’t have the money to cover the expenses of the vacation you took last month. It is too late at that point. What you have done in the past is not important. The best way to start to move your family finances in a positive direction is to create a realistic spending plan that you can use to manage your finances going forward. The idea is to project, or forecast, your future expenses and income over the next twelve months. One of the best ways of doing this is to use past income and expenses as a guide to the future. Of course, you will take into account any potential changes that might take place in the year ahead. For example, your spouse might finish a training course or college and qualify for a raise in salary at work. Or, a child may be leaving home for college, which will lead to increased, or possibly decreased expenditures. Maybe you are planning to purchase a new home or a car. Perhaps a newborn is on the way. All of these life changes will impact your spending plan, so it is important that you take a hard look at not only the past year of income and spending, but, also, what may happen to change things in the coming twelve months.
To help you create a spending plan, create a Spending Plan Worksheet. That way, you get to see the monthly fluctuations in your spending patterns that will help you plan your spending more accurately. I have found it helpful to include each month of the year and extend out for twelve months.I recommend that your worksheet have as much of the same information as possible. It should include room for:
-Income and Expense categories listed down the left side of the sheet.
-Months of the year headings across the top of each column.
-Rows at the bottom of the sheet for totaling each column’s expenses and another row below it to calculate your net surplus or loss after you subtract total expenses from total gross income.
-A column at the far right-hand side of the worksheet to total each category for the year.
If you have a computer, there are many fine software programs that can be purchased inexpensively or that are available for free on the Internet that can make the chore of setting up a spending plan much easier. Excel is perfect for setting up a worksheet if you know how to use it. If you’ve bought your computer in the past three to five years, chances are you have a financial program preloaded onto your computer that includes a budget worksheet of some sort. If you do not have "bundled" financial software, I suggest you visit your local software retailer for a good basic budgeting program or search on the Internet using key search words such as budgets or budgeting. Also, most major banks offer programs on their Web sites. Several software programs will allow you to track your expenses throughout the year. Some of these tracking programs can even be used to help prepare your taxes, assuming you keep the system up-to-date throughout the year. If you do use it to prepare your taxes, some or all of the cost may be tax deductible depending on the prevailing tax laws at the time you are reading this. Always double-check tax questions with a certified tax preparer or at http://www.irs.gov/.
If you don’t have a computer, use some paper and a ruler to create a worksheet, or do what I did: Buy a standard bookkeeping tablet in the office supply section of any retail store. It will already be set up for you to input expense and income information. In the end, you will actually have two worksheets: the spending plan worksheet, where you will project your expected income and expenses for the upcoming year, and a second one set up the same way, where you will track your actual income and expenses. These two sheets will allow you to compare to your planned income and expenses. You can combine the information from both onto one worksheet if you wish. Do whatever works best for you to help monitor your plan against what is really happening throughout the year.
Like this article?
You see, most people don’t realize they are having money problems until they are in serious trouble. By then it can be too late to do anything constructive to change the situation. Being able to see where your money needs to go, before you pay a single bill, will allow you to re-direct other spending to take care of the most important things first. The worst way to handle your family spending is to go through the month oblivious to what bills you are paying and how much you are spending. Then, once you get your bank statement and realize you don’t have as much in the bank as you thought, you try to recreate the month’s spending and deal with more bills and a lack of money at the end of the month. What if you get to the end of the month and you are out of money? This happens all too often for most families. This problem is so common, they write songs about it. Have you heard the country song, "Too Much Month at the End of the Money?"
I mention families quite often because I know the majority of my audience will be families. But, I want to be clear to my single friends who are reading this that you are actually in a better position to begin spending your way to wealth because you can make changes more easily. Also, you probably don’t have the expenditures on a weekly, monthly, and yearly basis that a family will have. On the other hand, while it is true that a single person can make changes more quickly than a married couple, single people are also in the paradoxically precarious position of having more discretionary income. If you do not have children in your household, you may have an additional $5,000 a year, or more, at your discretion, which you could easily throw away without proper, businesslike spending strategies and a realistic spending plan.
You do not need to have a degree in accounting to accomplish what I am talking about, as you will see. You can run your family spending on a pad of paper. The keys to success are planning, organization, and consistent record keeping, in addition to a commitment to the goal of building wealth for your family’s future. Planning is the most crucial aspect of creating a good spending plan and often the toughest part of the job. Getting started is difficult and, when it comes to taking a detailed look at your family spending habits, it can be painful as well. To plan well you must have honest information about the project you are planning. Since your spending is the subject, you’ve got to know the facts about everyone’s spending habits, including your own. When I first went through this exercise, I disliked looking at all the money we were spending. I could not believe it. It took writing everything down on paper and adding up all the bills and expenditures to realize we were not saving a penny. In fact, if things continued as they were going, we not only would have zero savings but would also actually go deeper and deeper into debt. This normally happens when people outspend their income. And there is no income you can’t outspend.
When you start outspending your income you start to borrow money from credit cards, banks and other sources, usually at very high interest rates. Once you start to do that, the fall into financial oblivion is accelerated. You find yourself trying to stretch the same income to pay all of your regular bills plus the added burden of interest. When I looked closely at our family spending, I expected to find lots of frivolous expenditures on things that we really did not need. But I was shocked to find that what we were buying was necessary. I mean, I don’t have to tell you that it costs a lot of money just to cover the basic essentials of life, let alone any luxury items. Most families are not failing financially because they are spending money on fancy cars and elegant wardrobes. The problem is they are overspending on every item they buy so there really is no money left over for any thoughtless splurges. And if this family does happen to save money on some purchases, the savings are soon lost to overspending as well.
Taking a very close look at your essential purchases and how much money will be needed to take care of those purchases on a monthly and annual basis will open your eyes to exactly how much money you will need to earn just to cover your expenses. This will also show you whether you will have anything left over for discretionary spending. My plan is for you to know all of this information before your year starts, not after you discover that you don’t have the money to cover the expenses of the vacation you took last month. It is too late at that point. What you have done in the past is not important. The best way to start to move your family finances in a positive direction is to create a realistic spending plan that you can use to manage your finances going forward. The idea is to project, or forecast, your future expenses and income over the next twelve months. One of the best ways of doing this is to use past income and expenses as a guide to the future. Of course, you will take into account any potential changes that might take place in the year ahead. For example, your spouse might finish a training course or college and qualify for a raise in salary at work. Or, a child may be leaving home for college, which will lead to increased, or possibly decreased expenditures. Maybe you are planning to purchase a new home or a car. Perhaps a newborn is on the way. All of these life changes will impact your spending plan, so it is important that you take a hard look at not only the past year of income and spending, but, also, what may happen to change things in the coming twelve months.
To help you create a spending plan, create a Spending Plan Worksheet. That way, you get to see the monthly fluctuations in your spending patterns that will help you plan your spending more accurately. I have found it helpful to include each month of the year and extend out for twelve months.I recommend that your worksheet have as much of the same information as possible. It should include room for:
-Income and Expense categories listed down the left side of the sheet.
-Months of the year headings across the top of each column.
-Rows at the bottom of the sheet for totaling each column’s expenses and another row below it to calculate your net surplus or loss after you subtract total expenses from total gross income.
-A column at the far right-hand side of the worksheet to total each category for the year.
If you have a computer, there are many fine software programs that can be purchased inexpensively or that are available for free on the Internet that can make the chore of setting up a spending plan much easier. Excel is perfect for setting up a worksheet if you know how to use it. If you’ve bought your computer in the past three to five years, chances are you have a financial program preloaded onto your computer that includes a budget worksheet of some sort. If you do not have "bundled" financial software, I suggest you visit your local software retailer for a good basic budgeting program or search on the Internet using key search words such as budgets or budgeting. Also, most major banks offer programs on their Web sites. Several software programs will allow you to track your expenses throughout the year. Some of these tracking programs can even be used to help prepare your taxes, assuming you keep the system up-to-date throughout the year. If you do use it to prepare your taxes, some or all of the cost may be tax deductible depending on the prevailing tax laws at the time you are reading this. Always double-check tax questions with a certified tax preparer or at http://www.irs.gov/.
If you don’t have a computer, use some paper and a ruler to create a worksheet, or do what I did: Buy a standard bookkeeping tablet in the office supply section of any retail store. It will already be set up for you to input expense and income information. In the end, you will actually have two worksheets: the spending plan worksheet, where you will project your expected income and expenses for the upcoming year, and a second one set up the same way, where you will track your actual income and expenses. These two sheets will allow you to compare to your planned income and expenses. You can combine the information from both onto one worksheet if you wish. Do whatever works best for you to help monitor your plan against what is really happening throughout the year.
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