Your 4 Week Financial Check-Up Challenge: Week 2

A couple of weeks ago marked the beginning of a Four Week Financial Check-Up Challenge. For some, these “best practice” financial behaviors are a part of the daily routine and you already create world class budgeting spreadsheets and could teach classes on making every dollar count. For others, just the thought of getting financially naked and examining the state of your financial affairs is a bit overwhelming.

You may be somewhere between those two extremes but the purpose of this week’s financial check-up is to stress the importance of being different. How different, you may ask? Well, I am talking about being one of those seemingly strange and awkward types that actually create AND follow a budget on a regular basis.

Pop Quiz: When you hear the word “budget” what are the first thoughts that come to mind?

Option A: Budgeting = frustration, constraint, boredom, failure, annoying conversations with a spouse, guilt, stress, procrastination, time consuming, fantasy world, and flat out too difficult to manage with so many moving parts in our lives

Option B: Budgeting = empowerment, achieving goals, eliminating debt, taking charge, commitment, focus, easy, automatic, guilt-free money talks, flexible, real world, and personal

Be honest. If you aligned more with Option A, you aren’t alone. We all know about the importance of budgeting and frankly as a financial planner, I feel like a broken record on this subject. However, the reality is that not all of us have the discipline to follow a budget to perfection on an ongoing basis.

Why is something we all know we should be doing so hard to actually do? Most people don’t have a system that fits their personality or sets them up for success and stop when life happens. Remember what I said earlier about being a little different than the average good intentioned wannabe budgeters? Throw out the word “budget” and start following a spending plan. Most importantly, make it a personal spending plan.

Track your expenses and follow a personal spending plan. Use what has happened in the past to guide your future spending plan. In most cases, looking at a 3 month spending average is helpful to capture those irregular expenses that don’t occur each month. But keep in mind that if you complete an Expense Tracker worksheet in May and you pay your tax bills or buy holiday gifts in December, you may be missing some major expenses. Online budgeting tools such as Mint, Yodlee, and Personal Capital can help simplify the tracking process and look back at a 12 month spending average across different categories of expenses.

Then, you can focus on an even more important task compared to tracking where your money has gone in the past. You can create a personal spending plan that starts setting spending limits in advance. Just keep in mind that in the real world of budgeting, life always seems to get in the way of our plans so maintain some flexibility and roll with the punches.

Pay more attention to the big stuff at first. It’s true that small changes in life like brown bagging our lunches instead of going out to eat and home brewing coffee or cutting back on vending machine use can free up extra dollars. I am not recommending that you forgo efforts to make those small changes.

But before you devote energy to the search for found money in your spending plan, identify the top three spending categories that require your immediate attention. You probably already have one or two in mind but will never know just how much extra money you can free up for savings, giving or paying down debt until you examine those spending habits. The Big Three are usually related to housing (mortgage, rent, utilities, insurance, taxes), food (groceries, dining out, fast food), and transportation (car loans, auto insurance, fuel).

Next, put your action plan in writing and identify the spending categories you will focus your attention on first with your new and improved personal spending plan. Don’t just write down how much money you plan on saving. Identify how you plan on following through on the plan. Once you’ve made some changes within the Big 3, you can continue to use that momentum to examine those smaller expenses that can still result in huge changes over time.

Automation is essential. Spending plans are only effective when we use them as a guide. Our spending plan becomes less of a guide and more a source of guilt when we stop following the plan. An excellent strategy to avoid falling victim to procrastination is to automate our plans as much as possible.

  • Use online budgeting tools and set frequent reminders and alerts on your phone or email.
  • Pay bills online and set up automatic payments so you never miss paying a bill.
  • Put your student loan payments on automatic draft.
  • Transfer money directly to a savings account separate from your day-to-day checking account once you are paid.
  • Buy routine groceries and other household products online with a click of the button (and without the temptation of walking the aisles with impulse buys staring you in the face).
  • Schedule ongoing contributions to investment accounts and IRAs.
  • Sign up for automatic rate escalation in your 401(k).

Focus on spending and set up guidelines in advance. I cannot stress the importance of setting some built-in controls to your spending plan enough. Creating and following an effective spending plan should never be approached with a one-size-fits-all mindset. The analytical thinker may want to develop a spreadsheet system that tracks every dollar of spending, whereas the former “money avoider” may benefit from a simple system that automates spending, saving, and paying off debt as much as possible. The main concept is that you have a system that fits your money personality and you have a system for monitoring your progress over time.

Heck, if you find yourself getting frustrated with the process of trying to categorize your spending across different areas, just get back to the basics with a Simple Spending Plan:

Step 1: Identify your total after-tax income

Step 2: Determine the total amount of your fixed monthly expenses (housing, taxes, insurance, debt payments, utilities, savings for emergencies, retirement savings, etc.) and  AUTOMATE these payments and savings contributions.

Step 3: Subtract your fixed monthly expenses from your income. (This is your spending allowance.)

Step 4: Track your progress using a separate account for spending that is funded with your monthly allowance or start using an envelope system.

In summary, this week’s Financial Check-Up Challenge to create (and follow) a personal spending plan that fits your money personality is something we have all heard before. If you are already following a spending plan, it never hurts to re-examine your spending priorities and see if you can make any tweaks to your plan to help you reach your goals faster. If you’ve been hearing that nagging voice in your head get louder and louder telling you to be different than the average American, take action and establish a spending plan. Just make sure it is “personal” to your life goals so you can add more purpose and meaning to this essential financial planning discussion.


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