TheMoneyGeek Unplugged

Two of the most hated words in the English dictionary are “diet” and “budget”.  Whether you call it a diet, counting calories or eating smart, you know deep down what that means.  When you think about it, the first three letters of diet spell “die”, so how could it be a good thing?

Similarly, whether you call it a budget, fiscal responsibility or a spending plan, deep down you know it means that you have to cut back on spending.  Fortunately, you don’t have to go hungry just because you are on a spending plan.  And just like weight loss, developing a spending plan can yield significant financial and non-financial benefits:

• Being in control of one’s finances reduces stress. Stress can make people eat more and spend more.
• Having a spending plan in place means you’ll have already prioritized the key activities, expenditures and projects you’ll need to make for the year and the money you’ll need to afford them.
• Spending less time worrying about money means you’ll have more time to think about the people in your life.
• Fewer money issues means lesser strains placed on your relationship with your significant other.

Here are some ideas you may want to incorporate into that process:

Don’t be afraid to ask for help: Do you know where you need to be? A financial planner can ask the right questions and develop a customized plan to help you figure out your starting point and where you’ll finish based on your age, earnings potential and the new habits you’ll develop.

Start tracking every dollar  you spend: Whether you do it with a pen and a notebook or a computer program (like Quicken or Microsoft Excel), make a concerted effort to track your everyday spending.  Physicians say that overweight people should track every morsel of food they eat; with money, it’s a similar thing.  Knowing where every dollar goes gives a quick picture where certain dollars can be saved or invested.  Some say that you should track each and every penny, but that’s not always necessary unless you want to.  What is mandatory is that you write it all down somewhere.  Doing it in your head doesn’t work.

Prioritize… When it comes to spending, there are needs and wants.  Try this exercise: You can do this on a big 2009 desk calendar (or an electronic calendar that allows space for lots of notes to yourself).  Mark down at the appropriate dates and times of the year items for which you need to spend and those for which you want to spend.

What are needs?  In part, food (not carryout or restaurant meals), the monthly mortgage, tuition, auto or rent payments; monthly utilities; home, auto, life or disability insurance; retirement savings; property taxes and credit card payments (for past purchases).

What are wants? Wants are non-essential items like vacations, non-essential home improvement projects, restaurant meals (you can cook at home, cant you?) or treats like clothing splurges, jewelry or electronics.  Compare these total expenditures to your total income.  What will this crowded calendar tell you?  That by attacking debt, making certain sacrifices and spending and saving smarter, you can eventually “un-crowd” that calendar and take control of your financial life.

…then zero in each month: There has to be a living, breathing side to budgeting that accommodates change.  Do this: Near the end of each month, make a list of the specific “needs” and “wants” you’ll face next month and figure out how much money you’ll have for wants after needs are addressed.  For example, if your car needs a necessary repair, that’s certainly going to boost the “needs” side of the page.  If you find, due to a one-time event (paying off a particular credit card, for example), that you have more to spend in the “wants” column, then it’s time to decide whether it’s time for a treat or to throw more into savings, investments or attacking any other debt.  Every treat that you put off gives you much satisfaction of getting closer to your financial goals, but, just like a diet, you don’t want to deprive yourself and get so frustrated that you go on a spending binge.

Identify and plan for long-term goals: You must think about the things that you really want to do with your life and what those things will cost.  Putting goals in writing gives them a formality and a starting point for the planning you must do.  If these goals require saving, make sure that you put those savings dates on the financial calendar you made.

Build failure and recovery into the plan: How many diets have evaporated with the words, “I blew it?”  The fact is, with food or money, everyone goes off course at times.  The important thing is to have a plan for corrective action.  If you’re about to make an impulse purchase, implement a three-day spending rule.  That means you should give yourself three days to check your budget and think through the purchase before you make it.  If you can minimize the damage and get back on course, your progress will continue.

My experience with those who adopt a spending plan is that they feel a certain sense of freedom that mirrors the feeling of fitting into a pair of jeans that haven’t fit in years.  Anytime you take control of important life decisions makes you feel empowered and ready to tackle new challenges.  Good luck with it!

Note: This post is based in part on an article produced by the Financial Planning Association of which I am a member.