The lessons learned from the 2008 recession prompted most of us to seriously consider financial planning. One of the things that we kept a close eye on was our spending. In truth, those bad spending habits that we got used to became our financial undoing. We spent beyond our means by using credit cards recklessly and it cost us a lot of money. For some of us, it led to losing some of the assets that we hold dear. It meant letting our homes go into foreclosure, selling our cars and even skipping the usual entertainment expenses that made us really happy.
Thankfully, financial plans can help us curb the bad habits that led to our money’s demise. But be very careful. Even if you create the most promising plan there is, you need to be able to implement it. A lot of us started strong with our plans but unfortunately, not everyone was successful in applying it in their lives.
A plan is necessary to keep your finances under control and this article will try to analyze why your spending never worked out that way you planned it to.
Comparing your budget with your spending plan
In most cases, your spending plan is confused with a budget plan. Some articles actually refer to them as one and the same. But you need to know that they are two separate concepts. Budgeting is the first step towards financial independence and your spending plan will serve as your action plan to connect them.
Here are other concepts that will help you differentiate the two.
Spending plans will be more appealing to follow because it does not have the restricting image of a budget plan.
Budgets will tell you how much you are allowed to spend for a specific expense category. The spending plans will allow you to control that total amount to satisfy your actual needs.
Spending plans can help you detail your wants and needs. A budget plan is more concentrated on your expense categories.
Budget plans will help you define what is left for your discretionary income. Spending plans can map out where you discretionary income will go.
More importantly, your spending plan will help define the different patterns that you have in your life. You can see when your housing costs spike and when food prices go up. It can help make your future financial plans more accurate.
Reasons why your plan for monthly expenses is not working
Now that you know how to differentiate a budget from a spending plan, let us identify the possible reason why it can fail you.
It does not include everything. We’ve mentioned how this plan is actually more detailed than your budget. You have to make sure that it includes all the expenses that you usually make. This is how you ensure that it remains true to the restrictions of your budget. You do not want to end up spending more than what you are allowed to. Ideally, your purchase plans cover a period of one month. Make sure that you include your annual and seasonal expenses too.
It failed to indicate your priorities. Another reason why this plan can fail you is when you did not indicate your priorities. This is very important to keep your plan from concentrating too much on the mundane expenses that make you happy. The whole purpose of planning is to ensure that you will not miss out on all your expenses. Put the priorities high on the list and make sure you understand the factors affecting them. In fact, Moneyning.com published an article that indicates how every generation usually have different priorities. For instance, Baby Boomers lived after the second World War and it made them heavy spenders compared to other generations. Millennials witnessed how the 2008 recession crippled their parents and grandparents financially, that made them more cautious about credit – especially credit card spending.
It is not realistic. The third reason it is not working is because it is not realistic. You may want to spend a lot on entertainment expenses but when your needs dictate that more funds should be allotted for your debts, then you should reconsider your plan. Based on the data from the Bureau of Labor Statistics (BLS.gov) last March 27, 2013, the average expenses of households depend on the income. The highest 20% allott 30.2% of their income in housing costs while the lowest 20% spend 40% of their income on the same category. In terms of food, the highest 20% spend 11.4% as compared to the lowest that spend 15.8% of their income on this expense. For personal insurance, the lowest 20% spend only 2.1% – which is very low compared to the 16% of the high income earners. Obviously, the low income earners have to forego insurance to pay for more important expenses. Your spending plan should consider all of these to make it realistic and true to your needs.
It is not flexible. Lastly, your plan may not be flexible and that is the reason why it is not working for you. Most spending plans require changes from time to time – just like your budget. As mentioned, your priorities are influenced by a lot of things and this should be something that you consider carefully. As you age, your needs will change and that should prompt you to constantly look at your spending plan to see if it is still workable.
Tips to create a working plan for purchases that compliment your budget
To be a smart spender begins with a well crafted spending plan. Here are some important considerations when you are trying to make this.
Base your spending on your net income – not our gross. Nobody ever sees their gross income. If you base it on this amount, you will always fall short and some of your expenses will end up being unpaid.
Always analyze your current spending. What you are spending a few months ago may not be the same as what you need right now. Always check if your spending plan is still aligned with your goals.
Categorize your expenses to keep the revisions from being tedious. You can put the fixed expenses first as these are the regular payments that you constantly have to make. In most cases, the amount does not change. These include your rent, loan payments, etc. You also have the flexible expenses that are still necessities but vary in amount every month. Your food, groceries and transportation can be placed here. Lastly, you have the discretionary expenses that are the expenses that you do not need to spend on all the time. These can be your clothing, shoes, and entertainment expenses. When you have to revise your plan, you only have to look at the flexible and discretionary expenses.
Make sure your income is higher than your expenses. If not, you will always have to spend some credit to take care of everything. That defeats the purpose of using this financial plan. Trade off some of the expenses that you can live without so you can afford those that you need to spend on.
StatisticBrain.com shows that the average household income is at $43,000. With the rising cost of living, this is just enough for a family of 4 to live on. If you want to make your spending less restrictive, you should consider earning more or cutting back. The bottom line is to make sure that you can control where your money goes and the plan that will help you achieve that is something that you can follow consistently. If it is not working for you, review the plan to see if it requires you to make some changes.
Here is a video created by National Debt Relief to help you learn how to budget for your household.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.