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What is a spending plan?
Why do we call it a "spending plan?"
Words can influence our attitudes without our being aware of
it. There's an expression: "It's all about attitude" and
it's true; our ATTITUDE often determines whether we succeed or fail at
any given thing! The word "budget" is a negative word to
many people because they associate it with deprivation, denying themselves
the things they want and like, scrimping, etc. But what if budgeting
is not about denial? What if a budget is really about having the power to
actually get the things you want most?
It's your money; you worked hard for it. You earned it, so you
get to choose how to spend it. A good budget isn't about
denying yourself the things you want, it's about giving yourself the
POWER to protect yourself from emergencies and get the things that mean
the most to you!
To increase your success, don't use the negative word "budget;" instead, call it your "spending plan." That's really what it is, a plan for how you choose to spend your money to reach your own financial goals see "Goal Setting for Financial Victory: Getting What You Want."
Why is this so important?
Most people do not have a truly accurate idea of the exact amount of their income and expenses. Usually, they underestimate their expenses, save too little, and then cannot reach their financial goals. And unless someone is extremely wealthy, failure to have a good spending plan can easily lead to financial disaster.
Also, expenses (and sometimes income) fluctuate during the year. For
example, your utility bills are not the same every month and depending on where
you live, there might be a big difference between winter and summer bills. A
good spending plan takes all changes in income and expenses into account by
changing all yearly income and expenses into a monthly average. So
if you spend only according to your plan, you will have the money for
the higher bills when you need it. A spending plan also helps you avoid
using credit that does not serve your goals, or spending money you don't
have.
How to make a good spending plan.
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Average all net income to a monthly amount, including irregular
sources of income like tips, commissions, bonuses, part time work, dividends,
etc. For example, a paycheck received every two weeks (every
other week) comes to 26 paychecks per year, not the 24 paychecks a year that
people paid "twice a month" get. That's an important
difference. Take the net amount you get from each income source
and figure how much you get from this in a year. Now divide this amount
by 12 to get your monthly average. For example, the total of 26 paychecks
divided by 12 would give you the correct monthly average for a job that pays
every other week. Hummingbird's free Spending Planner will
do these calculations for you.
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Average all expenses to a monthly amount. Be sure to account
for fixed, variable and periodic expenses.
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Check to be sure you have not forgotten whole categories of expenses. Try
to think of everything you spend money on in the course of a year. For
example, annual licensing fees or vehicle taxes are part of vehicle ownership
expenses. Did you remember to account for all expenses for children,
pets, cleaning products, home maintenance and personal grooming? Do
you have an entry for retirement savings, emergency fund savings,
and saving for your personal financial goals? There are many
programs to assist you with this. Hummingbird's free "Spending
Planner" is one such tool.
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You have now averaged all the things that change from month to month—both
your expenses, and possibly your income. Why? Because now
you have a spending plan that is your map for success. You spend according
to your plan, not what you have in the bank! Do you feel rich this
month? It's probably because your variable expenses were
actually less than the average on your spending plan or your income was higher
than usual. But if you spend only according to your plan, that "extra" money
will be available for the higher variable expenses later!
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Review and adjust. Look at your result. If you're spending
more than you have coming in, it's time for action! Can you increase
your income? Decrease or eliminate some expenses? If you can't
think of small ways to make the numbers balance, you may have to consider
drastic action such as moving to a less expensive place, getting a renter,
getting a second job or even moving in with family or friends until you can find another solution. With courage and
some discipline there is always a way.
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Track your spending to discover "money leaks." That's
money that leaks out of your pocket and you don't know where it went. To
track your spending, carry a small notepad and pencil with you and write down
every single cent you spend for one day. Then continue this exercise
for at least a
week, but a month is best. You will probably be surprised at the "money
leaks" you find!
Don’t put your spending plan “in a drawer.” Keep yourself motivated!
Motivate yourself with visual and mental reminders of your personal financial goals. To reach those goals, refer back to your spending plan every month. Remember, it's all about giving yourself power over your own money to get the things you want most!
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