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Smart Moves for Guaranteed Financial Success

Find out how you can accomplish the 6 smart moves for financial success.

By
Laura Adams, MBA,
Episode #204

Want to make this year your best money year ever? Getting started on the right financial foot is an excellent way to make sure you get the job done.

Smart Moves for Financial Success

The secret to success is a fundamental financial rule that can give you the power to create wealth. Though this financial rule is easy, almost 60% of American adults don’t do it and therefore they never get ahead. So what is it, some kind of secret investing tip that Wall Street insiders use? Nope, this essential rule is simple: follow a spending plan so you never spend more than you make. Stay with me and I’ll show you how to create a realistic spending plan in six steps.

What is a Spending Plan?

A spending plan is a proposed strategy for how to spend money before you ever receive it. It takes into account all your living expenses, obligations, and bills—plus the money you want to put aside for short- and long-term financial goals. You identify what amount or percentage of your income to spend on different categories—like housing, food, and savings—and make sure you hit those targets every month. For instance, you might decide to spend 30% of your money on housing, 20% on food, and 15% for retirement. 

Smart Moves for Creating a Spending Plan

Using a spending plan to live within your means is the holy grail of financial success because it gives you the power to create wealth.

Using a spending plan to live within your means is the holy grail of financial success because it gives you the power to create wealth. If you find that you’re going deeper into debt every month or living paycheck to paycheck without putting money aside for your future, it’s time to break those bad financial habits. Use the following six steps to create a spending plan this year:

Step #1: Determine Your Tracking Method

The first order of business is to decide how you should track your income and expenses. You can write information in an old-school paper notebook, enter it in a computer spreadsheet, or import it into financial software. Use any system that’s convenient for you (whether it’s low-tech or high-tech) so you’ll stick with it month after month.

Most financial software programs have a budget function that allows you to enter pre-set spending limits and to compare them to your actual spending. If you don’t use financial software, try a free web-based program like Mint.com that automatically aggregates transactions from your online financial accounts, allows you to create a budget, and organizes transactions into various spending categories that you create. (For more on how web-based programs can help you manage your money better, see chapter 4 of my new book, Money Girl’s Smart Moves to Grow Rich.)

Step #2: Create a Spending Plan Baseline

The second step is to look at how you’ve been spending your money over the past three to six months by creating a spending plan baseline. This is the best place to start because you can only improve what you measure, right? You should be able to get information about your previous income and expenses from your account statements or by importing data from your online accounts into software or into a computer spreadsheet. However, if you make a lot of cash transactions, your spending history probably won’t be so easy to recreate.

Going forward, I recommend that you simplify things by spending with a debit or a credit card only. However, if you insist on using a cash-only system, be diligent about saving receipts because you’ll need to enter them manually into your spending plan document or software register. It’s important that all of your transactions are captured and recorded, no matter if they’re debit, credit, or cash, so you have a complete picture of where your money goes.

Step #3: Create Spending Categories

After you have your baseline transactions, you need to establish spending categories to track. Some people lump transactions into just four or five categories, like housing, insurance, living expenses, and savings. Others like to break down those larger categories into lots of sub-categories. The point is to create categories that you want to monitor closely each month.

Step #4: Calculate Category Percentages of Income

Once you have your historical spending organized by month and category, the next step is to calculate each category’s percentage of your monthly income. Remember that you might have some expenses that you pay only once or twice a year, like auto insurance. Spread any lump sum expenses over the entire year so they don’t skew a particular month. For example, if your car insurance is $600 a year, allocate 1/12 or $50 per month for auto insurance. This is when using a computer spreadsheet can be really handy. Also don’t forget to account for any automatic payroll deductions for a workplace retirement plan or insurance benefits that you may have.                                                                                                                  

Step #5: Analyze Your Baseline

After you have an accurate baseline, analyze it and ask yourself if you’re happy with what you see. Are you putting money aside for your retirement and other long-term goals you might have, like education or a house down payment? What about short-term goals like building up an emergency fund or taking a vacation? If you’re not funding your goals, it’s time to make some serious changes and decide where you can cut back. This is where the rubber meets the road and you have to make some tough decisions that can put you on a better financial path.

Step #6: Prioritize Your Spending

As you set new spending guidelines for yourself, remember that you can reevaluate them and make adjustments as needed. There are no specific percentages that are right for everyone because each person’s lifestyle and goals are unique. For instance, a single person might be able to spend 35% of her income on housing, while a parent might need to spend less in order to have enough available to fund their child’s education.

Since housing is such a large expense, it can be a powerful place to cut back. Consider moving to a less expensive apartment, modifying or refinancing your mortgage, or finding a roommate, for instance. Or you might be able to eliminate several smaller expenses each month—like eating lunches out, gym memberships, and cable TV—to free up more money.

The best advice I can give you about prioritizing your spending is to start with the end in mind. In other words, figure out your goals first and then work backwards to achieve them. Don’t think of saving for retirement as something you do only when you have money left over each month. Instead make it a nonnegotiable amount that you pay yourself first. Your job is to get creative and to figure out how to live a healthy and happy life on your remaining money. There’s only one sure fire way to get ahead and make this your best money year ever: make saving money more important than spending it!

Money Girl’s Smart Moves to Grow Rich

To get smart moves for every money matter in your life—from finding the highest yielding bank accounts, investing for retirement, saving money on taxes, buying real estate, and lots more, pick up a copy of my new book, Money Girl’s Smart Moves to Grow Rich. It’s available in local book stores or on Web sites like Amazon.com and Barnes & Noble. Reviews praise the book as one that will enable you to “create a richer life—both financially and emotionally.” (Publisher’s Weekly)

Connect with Money Girl!

A great way to make this year your best money year ever is to work with a coach. If you’re ready to make big changes in your financial life, find out more about Laura’s one-on-one Financial Life Coaching at SmartMovesToGrowRich.com. For more money tips and advice, sign up for the free Money Girl newsletter and connect on Facebook and Twitter. E-mail your money questions to money@quickanddirtytips.com.

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