At the start of a new year many families make resolutions. Many of those resolutions are related to money. Folks have a renewed vigor to make and live on a budget, to get out of debt and to get their personal finances in order.
This makes it a perfect time for me to share with you the steps to making a spending plan that can keep your family out of future debt and position you to get out of the debt you’ve already incurred.
Why a Spending Plan?
Before I explain how to make a spending plan I need to explain why I avoid the word “budget.” Budget is to money what diet is to food; a budget represents everything I cannot do, everything I cannot spend money on and a tightened belt. It’s just like diet means everything I cannot eat. Yuck.
A spending plan starts in a different place. It starts with the idea that you have money. Whatever your income, if a penny passes through your hand, then you have money. You make choices about how to spend that money based on your priorities. Being planful about your spending can change your financial situation, it did with me.
Step 1: Make a Starting Point Spending Snapshot
A Starting Point Spending Snapshot is a reflection of what your life costs you today. How much money are you spending every month and where is it going? You wouldn’t use a map to navigate to a new place without being clear about where you are now. You’d get lost if you didn’t have both points clearly identified. It’s the same thing with your finances. To arrive at a new financial destination you need to know where you are starting and where you are going.
Your Starting Point Spending Snapshot reflects your family’s bottom line; take your income then subtract out your monthly bills and expenses, your debt payments and an amount for other “unexpected expenses.” When we are honest and lay out our life’s expenses in a mathematical formula it might look something like this:
Income
- Monthly Bills
- Debt Payments
- “Unexpected” expenses
(Negative balance)
Unexpected Expenses Are the Killer
As you figure out how much your current life costs you need to include all of your life’s expenses. This includes things that do not come up every single month like school pictures, new clothes, summer vacations, gifts, graduation parties, car repair and home maintenance. Our Starting Point Spending Snapshot has to include these things because they are very real costs and, for many people, they are budget busters (and the Starting Point Spending Snapshot is all about busting our budget mindset and getting honest).
Your task is to figure out how much you spent last year on each of these different “unexpected” expenses:
- Car insurance (if paid on any other schedule than monthly)
- Car repair/maintenance
- Computer, video and office supplies (video games, software, software licenses, printer paper, toner, etc.)
- Dry cleaning
- Entertaining/hosting parties and gatherings
- Gifts (birthdays, anniversaries, Christmas and holidays, friends’ birthdays, etc.)
- Hair care and beauty (hair cuts, colors, waxes, manicures, etc.)
- Home décor and furnishings
- House repair/maintenance
- Kid-related expenses (Clothes, school outings, extra curricular, photos, etc.)
- Medical and dental expenses (including prescriptions, co-pays, etc.)
- Subscriptions and memberships
- Taxes and license (license tabs for your car, property taxes [if not included in your monthly house payment], driver’s license renewal, etc.)
- Vacation and family outings
- Anything else that pay spend money on, but isn’t part of your standard monthly bills and expenses
Once you have an annual total for them, then divide that number by 12 to get a monthly amount. For instance, if you spent $18,000 last year on these types of things because you went on vacation, your daughter needed braces, the garage door needed new springs, and you hosted a family reunion in August, then the monthly amount you include in your Starting Point Spending Plan is $1,500 ($18,000 divided by 12).
It is Okay, This Once, to Have a Negative Bottom Line
This is the only time you’ll hear me say that it is okay for your bottom line to be negative. It is okay because the negative number is an honest number. It means you aren’t fudging things as if you are playing a numbers game. You aren’t deceiving yourself into thinking your life’s expense fit within your income, when they don’t.
Your task at this moment is not to make things balance on paper. In fact, that is never the ultimate goal. Our true aim is to get out and stay out of debt. Having a balanced spending plan on paper is a component to that, but living a balanced spending plan is the key.
Help for Those that Don’t Know How Much They Spent
If you aren’t sure how much you’ve spent on unexpected expenses in the last year, then you likely aren’t keeping very good financial records. I’d recommend that get started using Mint.com, a free, secure online tool, that will help you get and stay organized. You’ll create a free account, then link your Mint.com account to your online banking and credit card accounts. Then, as you spend money, Mint.com will see it, will record the expense and attempt to categorize it for you. With minimal effort you’ll get robust reports about where your money is going.
For those that think the idea of linking your online banking information is scary, let me share my perspective. First, you are giving read-only access and nothing more so Mint.com cannot move your money or initiate any financial transactions. Second, Mint.com is owned by Intuit, who owns TurboTax, Quickbooks, Quicken and other reputable financial software. Honestly, I think e-filing your taxes, where you provide your social security number and complete contact information, runs a larger risk of identity theft than read-only access to your banking transactions. You can also read what Mint.com says about its privacy and security.
Next Steps
When I faced the brutal facts that my husband and I were spending thousands of dollars more each month than what we made, even though we didn’t live an extravagant life and didn’t feel like we were overstretched financially, I experienced a swell of emotion. I was mad at myself for having been ignorant of our reality for so long. I was mad at the financial mis-truths that I had been taught and acted upon that helped me walk into a hole of debt. I felt like someone starting a 12-step program and coming to the place of saying “I admit I have a problem.” My problem was that my current life cost more than I could afford and it was a surprise to me.
Paradoxically, alongside the anger I experienced, I felt a strong determination to overcome. Fiercely determined, we set out to live within our means. We focused our effort in the weeks that followed our Starting Point Spending Snapshot creating a plan on paper that brought our life’s expenses within our income, then learning to live that plan.
Upcoming installments of this series will talk through the components of the plan we made that helped us get out of $50,000 in debt and has helped us stay out of debt since June 2006.
Your turn: What lessons did you learn or take away from your Starting Point Spending Snapshot?
**Disclosure: Actions you take from the hyperlinks within this blog post may yield commissions for Pocket Your Dollars.com. See Pocket Your Dollars’ disclosure statement for more details.
About Carrie Rocha
Awesome! Looking forward to hearing more of your story, and for more tips. :)
Yay! I can’t wait to hear more, Carrie!
I wholeheartedly second the recommendation for Mint.com. For me, money was too often out of sight, out of mind. Been using it since 2008 and it’s really helped us keep our money in front of us. When we save, we see the savings. When we charge things, they’re there. In front of us.
It’s easy, customizable to a lot of needs and robust in terms of the info it offers you.
Thank you so much for this! Inspirational!! I am HORRIBLE at expense tracking and started using mint.com this summer. It’s been a wake up call to say the least. The amount of money we were spending was ASTRONOMICAL…while we are not “negative” we’re spending a ridiculous amount (like 5 figures in 6 months ridiculous) on things we don’t need. I knew we spent too much money, but seeing it lay out like that with actual numbers along with it was mind blowing. Thank you so much for all you do!!
Hi. My name is Holly and I had (still do slightly) a spending problem. Though, I have admitted outloud I have a problem to myself and my husband I am still filled with guilt and am very angry with myself for letting things get the way they have. I am an avid reader and follower of PYD and am so very thankful that it exists. I look forward to the future posts and thank you for helping me save!
We’ve used mint.com for awhile but get annoyed because the amount under the budget overview doesn’t match the transactions. For example, it currently says we spent over $1000 in clothing this month (which we haven’t) and when you click on it, it only shows the $100 we’ve actually spent in clothing stores. It does this for many categories and is really annoying. So, basically, our numbers never add up correctly. We tried using the help, but there were only other people that had the same problem. Any ideas?
Shannon – I think it does that when you have the budget set to “rollover”. Go into the ‘edit’ part of that category and see if that box is checked. I have a hard time with that one too. I have changed all of mine so they aren’t “rollover”. Which, kind of defeats the purpose. I do like being able to track everything that we spend – but I don’t feel like I’m getting the whole picture.
Melissa
Thank you, thank you, thank you!! That fixed it immediately!
I’m going to check out mint.com. Thanks for sharing your story.
I seem to have trouble accounting for “unexpected” expenses. Sometimes they can be prodigious but the smaller ones are the most trouble to account for.
I think Mint.com will definitely help me out. Thanks a lot for the tip, and I’ll be reading your debt post next!