Millionaire Rule #2

Create a Spending Plan / Track Your Progress

The concept of personal finance is interchangeable in most people's minds with a single, dreaded, and much maligned word: budget. First of all budgeting is NOT the only component of personal finance, check out my article on Ten Simple Rules to Build Wealth for explanations of my other key tenants of personal finance. Secondly, the reason people hate budgeting so much is that for most people a budget is a rigid set of rules which tell a person how to spend their money. This sets a person up for failure because life is not rigid, it ebbs and flows; it has booms and busts. From one month to the next it can be impossible to know for sure what unexpected events may change your priorities, force your hand, or break your rules. The other unintended consequence of rules is that when they are broken we often feel guilt, depression, or anger with ourselves or others we blame for our perceived failure.

Through personal experimentation and by incorporating the advice of great blogs (Get Rich Slowly), articles (Making a Money-Smart Spending Plan), and books (Total Money Makeover Workbook) I have replaced the budget with a more flexible system to combat some of the negatives outlined above and still accomplish the important goal of planning and tracking spending.

The system I have adopted to help guide my finances is called a spending plan. To create a spending plan, first you need to assemble some basic financial information such as a pay stub, monthly bills, debt balances, and bank statements. You need to have a broad view of where you stand today, which is a simple way of saying your 'balance sheet'.

The next step is to look at your goals and your balance sheet and determine your priorities. For me, my first priority is to provide for the needs of my wife and our household. That means that buying a modern, spacious house and maintaining it in top condition is my first priority. A close second place in my priority list is to invest for retirement. For comparison, one expense category that I place near the bottom of my priority list is to wear mall bought, name brand clothes. Each person will have a different set of priorities for their money. I realize that spending less on my home would free up money to save more for retirement, but a spending plan needs to reflect your values or it will be impossible to follow.

The next step is to assign rough dollar amounts to each priority in your list. Expenses should be identified as fixed, flexible, and discretionary. Fixed expenses are the bills that must be paid every month like a car payment or mortgage. Flexible expenses are the bills that can be changed by behavior such as food, gasoline, and telephone bills. These expenses will always exist and can not be reduced to zero; however, a person does have a great deal of control over how much is spent each month (think canned veggies and tuna vs. steak and wine). Discretionary expenses are those which are entirely optional such as gifts and recreation. It can be helpful to identify variable expenses which change drastically from month to month and find the range of the bill. Heating oil, for those who use it, is a widely variable cost that needs to be specified in this way. The minimum payment on revolving debt should also be specified at this stage. Finally, add up these rough expenses to get a sense for how much money is spent each month and where it goes.

The last step to creating a spending plan is to revise your goals and your spending to make sure they are in line with your priorities. If your top priorities are being neglected for the sake of lower priorities take that to heart and create a goal that will seek to realign spending. If a single priority such as saving too much or buying too much gasoline is throwing the spending plan out of balance you can create a goal that will seek balance.

Now that you have created a spending plan it is important to recognize that this statement is a living document about how you wish to spend your money. It is equally important to the success of the plan for your progress to be tracked. This is an affirmative process in which you focus on the goals that have been achieved and create new goals in line with your priorities. I use online tools to trace my net worth, my debt, and my investment portfolio. A monthly review gives me positive reinforcement. Of course setbacks and changes will happen as a part of life. A spending plan embraces these changes and adapts.

A spending plan can help you reconcile spending with your priorities. It allows you to plan and track spending without the strict rules of a budget. Goals which are created as a part of a spending plan provide milestones for those who Aspire 2 Wealth like me. Check out the rest of the Millionaire Rules for more rules to grow wealthy.