Planning Your Spending
Episode #10 of the course Personal finance concepts by Maureen McGuinness
“The secret to financial security is not to have more money, but having more control over the money we presently have.” –Auliq-Ice, author
One of the reasons that tracking your spending is emphasized is that it gives you a better starting point for planning your spending. Planning your spending is often referred to as creating a budget. My preference is to refer to it as a money plan, because there are fewer negative connotations. Budgets can feel restrictive, whereas a money plan puts the control back in your hands.
How to Create a Money Plan
Creating a money plan that you follow on a monthly basis is usually easiest because it aligns with your monthly pay. It’s also important to look ahead by at least a few months to help take into account irregular expenses.
1. Pay yourself first. As soon as your paycheck hits your account, take a percentage (1-10%) of it and put it straight into savings. You can set this up as an automated payment taken monthly.
2. Calculate the essentials. What money do you need to put aside for your basic living costs? Examples: rent/mortgage and bills (electricity, gas, internet).
3. Calculate the basics. What money do you need to put aside for groceries and gas/commuting costs? Examples: Food shopping, clothes to replace ones that are no longer wearable.
4. Estimate big expenses for the year. What one-off expenses do you pay every year? Examples: Car insurance, car taxes, commuter season ticket, holidays, weddings.
70/20/10
If the suggested money plan above feels too complicated, you could use a simpler method: 70/20/10. 70% of your income covers your essentials and basic living costs, 20% of your income covers anything discretionary (e.g., eating out, going to the movies), and then 10% goes towards your savings goals.
Optimizing Every Month
One of the benefits of tracking your expenses is that you can track alongside your spending plan. You don’t have to be rigid; flexibility at the beginning is key for finding what works for you. As entrepreneur Tim Ferriss says, “The decent method you follow is better than the perfect method you quit.”
Write It Down
Whichever approach you choose, the key is to write it down. Research shows that you’re more likely to stick to a plan when it is written down.
In summary, create a basic money plan to start diverting your income toward your goals.
Recommended book
”The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money” by Carl Richards
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