Smart Financial Planning isn’t as Hard as You Think

There are all sorts of plans and programs and books out there to help people get out of their financial holes and step into a fresh, healthy budget plan. I’m not saying those programs don’t have value, but there is a very simple (and free) way to make sure you stay out of the red when it comes to your finances. Make sure more money is coming in than is going out, and make a conscious, organized, and concerted effort to track your spending.

When to it comes to budgeting, many find it right up there with dieting and root canals in terms of the pleasure factor (which is probably why so many people feel they always fail at it!). However, tracking your spending and disciplining yourself to live within your means and save for the future is definitely worth the effort. If budgeting is not a natural bent for you, don’t give up on the idea altogether. I promise, with just a willing attitude and some good resources to help you stay disciplined, you’ll be able to get on track with your finances.

So, what are my best tips for staying on top of your financial game?

The basic report you should complete (on at least on a quarterly basis) is a cash flow statement. This report tallies your income and expenses in several key categories. It’s the surest way to see whether you’re living within your means and where your spending may be excessive. After subtracting all of your expenses from your income, you’ll see whether your net cash flow for that period is positive or negative. Remember, the goal is positive, positive, positive!
There are many online tools to help analyze your cash flow  (e.g., www.quicken.com and www.mint.com). In the past, analyzing cash flow was a lot more work—you had to save your receipts and organize them manually. But nowadays, if you use a debit card and checks for your purchases and bills, and you link your bank account to your online budgeting program, it will automatically categorize your spending and indicate where your money is going. It will even send you an email in the middle of a month to let you know if you’re over budget in a particular category (it knows if you’ve been bad or good, which is great for accountability!).

Even if it’s just a 75-cent daily newspaper or a $10 Netflix subscription or a $4 (or more!) latte as you head to work each morning, make sure you account for every single dollar you spend. That’s how you can see exactly where your money is going. You may be surprised when you look at your spending after even just a couple of weeks. The nickels and dimes add up!

Analyzing spending and developing budgets are great skills to develop in the young people in your life. For young adults just starting out, tracking their spending will help determine how much they can afford for rent/housing and a car, significant expenses each month. It will also help them get an idea of how little things here and there can add up and destroy their budget! (I’ve heard many freshly-launched young adults say they’re shocked to see how quickly money gets spent!) How much should average living expenses cost? The following are typical expenditure categories and the rough percentages each should represent:

  • Housing/rent (includes utilities)    30-35%
  • Household/personal items                  20
  • Autos/transportation                          10
  • Charitable giving                             5-10
  • Savings and investments                     15+ (not an expenditure per se)
  • Entertainment and leisure                    7
  • Debt/loans                                           5
  • Insurance                                             5
  • Miscellaneous                                       3

While the above percentages are ballpark figures (and they do change through life), spending more than five percent above these levels is getting “up there,” with the exception of savings and investments and loans for new college grads. Compare actual spending to these ballpark figures, and you’ll have a good sense of whether you’re overspending in particular categories. And, take special precautions against buying too much house or car—these expenses get many people in trouble because the payments are fixed.

Wise financial planning requires knowing where your money goes—it’s as simple as that! You’ll make better financial choices, build a stronger credit rating, and develop good savings habits that help build wealth.
 
Do you track and analyze your spending?  How do you do it?  Have you trained and modeled this to the young adults in your life and, if so, how? We’d love to hear your insight and experiences!

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