What even is a budget? It sounds totally scary and not fun. I suspect this is why lots of people just take the “I don’t wanna” approach.
Now if you’re a client of IRC, you’ve heard this message many times. But for everyone else, let’s get excited about talking budgets . . . who’s with me?
A budget, or as I prefer to say, cash spending plan, is a super useful tool that does just what it says . . . creates a plan to spend your money. Now that sounds more exciting . . . a plan to spend money!
A cash spending plan gives you the freedom to determine ahead of time whether you have enough money to do the things you need to do, and even better, want to do. If you come up short on your anticipated wants and needs, then a cash spending plan allows you to prioritize your spending on the things that are most important to you and your family.
To create a cash spending plan, simply get out a notebook or if you’re so inclined, create a spreadsheet that shows your sources of income (wages, rental income, alimony, etc.) less your fixed and variable expenses. Fixed expenses are amounts that do not change each month such as your mortgage, rent, insurances, loan payments, etc.
Variable expenses, as the name implies, vary in amount each month, and can be grouped into two categories – flexible and discretionary. Flexible expenses are anything that’s a necessity, such as utilities, food, fuel. Discretionary expenses are for things that really aren’t necessities, but make life more enjoyable, such as trips to the nail salon, the mall or monthly fitness memberships. I suggest using an average of several months as a baseline for your variable spending amounts.
Once you subtract your expenses from your income, what is the amount remaining? If it’s positive, then high five. Let’s start to set up automatic savings each month and treat them liked fixed expenses. If it’s negative, then it’s time to think about ways to increase your income or reduce your spending.
There are several benefits to having a cash spending plan, whether you’re single or supporting a family:
- It’s a road map for your goals. Having a cash spending plan allows you to create a path to achieve your long-term financial goals. If you don’t have a handle on how your money is working for you, then how will you be able to save up enough to put a down payment on a home, take that trip to the Caribbean or live your best life in retirement?
- It helps to control your spending. Without a spending plan, there’s nothing really holding us back from spending beyond our means. We all have a general idea about what we spend on a regular basis, but without actual data, it’s easy to lose control of our spending habits. A spending plan helps us understand the impact of what we think are insignificant expenses, such as quick trips through the drive thru or stops at the local TJ Maxx.
- Avoid debt and improve your credit. Having a spending plan ensures you pay your bills on time, and hopefully it will help you make better choices by not taking on too much future debt – both help to build your credit score. Paying your fixed expenses before your discretionary spending allows you to make paying off your debt a priority.
- Your relationships will improve. Whether you’re in a business partnership or a romantic partnership, a spending plan keeps you on the same page financially. It will help you plan your financial future together, hold each other accountable and help you feel like you are fighting for the same team.
- You’ll sleep better at night. How many nights have you tossed and turned worrying about your finances? People who lose sleep over financial concerns are allowing their money to control them. Take back the control. We all worry about the monster under the bed until we are brave enough to turn on the lights, look under the bed and realize nothing scary is there. Creating a cash spending plan is facing the “monster” under the bed.
These are just a few of the many benefits of having a cash spending plan. There are countless advantages to knowing where your money is going and making sure it’s working for you. So, what are you waiting for? Go be the boss of your finances.
By: Amy Getz