5 steps to take your spending plan from good to great
A wise man once said that “Change is the only constant in life”. Does your spending plan factor in this constant?
Developing a habit is hard…
The first time I saw a budget was overwhelming. My father took me into his office, showed me a bunch of bank statements and receipts of household expenses, and showed me how he kept track of these in an Excel spreadsheet. Back then I couldn’t imagine remembering to keep all my receipts or actually finding the time to sit down and track everything in a spreadsheet. And to be honest with you, I didn’t do this in the beginning. But my father, being the wise man that he was, gave me an incentive to create this habit. He told me that if I was able to save $10,000 at the end of 12 months, he would pay 75% of the cost of my first degree. And of course I’d have to track my expenses if I wanted to achieve this goal. Now, let me just explain that in Israel, you had to pay for your university education upfront. No money = No degree. At the time, I had just finished the army and was studying again to get a better high school result as I hadn’t focused on that while I was in high school – I had gotten smarter since my high school days. I was also working three jobs to pay for life expenses and save money for my university degree. Juggling study, three jobs and life in general made it challenging for me to find the time to track and manage my money. Until I found my why.
…Until you find your why.
One night I finally sat down in my room to look at how close I was to saving up for my degree. And then it hit me. At the rate I was going, I would need my father’s help to get into university or be one of the oldest university students around. No, thank you.
My great spending plan
So, I opened up my computer and started researching the simplest ways to track my spending and achieve my saving goal. I found a lot of good strategies but none of them suited me. I decided to just focus on putting aside money for my fixed costs and allowing myself to spend whatever was left over. I call this my great spending plan.
Now, why am I calling it a spending plan and not a budget? Simple. I hate the word ‘budget’. It just automatically makes most people (including my wife) cringe. It makes us think of having to give up something. A ‘spending plan’ on the other hand implies being able to ‘spend’ (I can see my wife’s eyes light up right now). So there you have it, perhaps a slight play on words, but a massive difference in perception.
What are fixed costs?
The term ‘fixed costs’ can seem a bit vague. The way I think about it is, the costs I would still need to pay for, even if I wasn’t working. For me, there are five fixed cost categories:
- Regular bills – costs that are billed on a regular basis, whether that is weekly, fortnightly, monthly, biannually or annually. For example, phone bills and utilities – still need to take a shower and eat, even if I’m not working.
- Unexpected costs – this could also be known as the ‘repairs’ fund, for when things we use every day break down and need repairing or replacing, often at the most inconvenient times. For example, when a tyre needs replacing, or you accidentally drop your phone in water.
- Emergencies – for when life throws you a major curveball and you need a financial safety net to allow you to keep paying your fixed costs for three to six months. This type of emergency could be job loss or a major illness or injury – to you or a loved one.
- Debts/loans – credit cards, mortgages, personal finance loans – basically anything you’ve paid for with someone else’s money that you need to repay. Personally, I love the strategy of repaying debts from smallest to largest, as this will give you the confidence and momentum to keep up debt repayments.
- Savings – or what I like to call a ‘dream fund’. Ask yourself, what’s something you’d like to save for. This could long-term, like your dream house, or short-term, like a holiday to sunny Honolulu in the middle of winter.
Now that you know what the five fixed costs are, the next step is to automatically direct money into accounts set up only for these fixed costs. Think of it like an electronic version of ‘jam jar budgeting’. Instead of five jam jars on a shelf in your house (not so safe), you’ll have five virtual ‘jars’ in a bank that money automatically goes into on a regular basis. I find the automation is another step that helps to simplify the process (no more having to remind myself to transfer money, or forgetting) and remove any temptation to use that money for something else at the same time. #winning. Whatever is left in the spending account is then up to me to spend guilt-free, knowing everything else has been taken care of. Now, there’s a bit more to learn around guilt-free spending. If this is something you’re interested in, you’re in luck as my eBook, Your Winning Number, will show you how to do this. You can download Your Winning Number for free here.
In a nutshell
One of the main reasons why budgets or spending plans don’t work long-term is that they haven’t factored in all the changes life brings. Perhaps you’ve taken into account some of the fixed cost areas I’ve described, but not all of them. Emergencies can seem unlikely when we’re in the peak of health and everything is going well. And that trip to Honolulu can look like a more appealing way to allocate your money (especially on a cold winter day in Melbourne, like today). But if you’re ever staring that curveball or unexpected bill in the face, you’ll be glad there’s money in those ‘jam jars’. Preparing for life’s constant is what takes your budget from good to great.
Is your spending plan ‘life-proof’?