Mastering Everyday Money - Day 1
#002: A simple spending plan
MASTERING EVERYDAY MONEY
A step-by-step guide to managing your money.
Understand there is a difference between spending plans and budgets.
Understand why knowing the difference matters.
What we spend on, is mostly a reflection of who we are and what we value. I say mostly, because sometimes it is circumstantial.
The Spending Plan
It took a while but it did click for me that when managing your money, horizons matter. Knowing this helped me understand that sound money-management was less about will power and rigorous discipline and more about planning - good planning.
A spending plan is your planning tool. It holds the long view of how you expect to spend your money and in what categories. It does something else I think is important: the spending plan is a reflection of your lifestyle.
Spending Plan is a lifestyle gauge made up of categories and their respective line items.
Pulling a plan together is straight forward.
Step 1: List and categories line items
You simply list all the things you pay for (hold off on the amount for now) and then decide which category they fall under.
In Figure 1, I have 6 categories (going across) with all their respective line items listed (doing down).
These categories are not prescriptive, just the ones I use.
Household: List of all your essential spends - groceries, utilities, rent/mortgage, phone bill, insurance, council tax, personal care, required travel/transportation.
Subscription: List of all your nice-to-haves - gym membership, magazine subscriptions, phone apps, club membership fees, TV packages etc.
Sunk Cost: Budgeting for long-term big spends - cost to replace what goods (washing machine, fridge, cooker), savings set aside for special occasions (birthdays, holidays).
Giving: money set aside for donations1 - this could be a set amount or a fixed portion of your income (for example 10%).
Debt Obligation: list of all debts - credit cards student loans, overdrafts etc, This should include interest payments.
Savings & Investment: split between short (1-5 years), medium (6-10 years) and long term (10+) goals.
Categorising your line items serves the following purpose:
You have clearly defined ‘buckets’ which translates to different areas in your life you are spending money on.
Each category can be quantified relative to the whole. If you want to compare your spending plan to someone else’s (I avoid doing this, and suggest you resist the urge to do so) then percentage spend per category will be a useful measure.
Each category can be looked at in isolation to the whole. When I have had times of unemployment (during the lockdown 2020-21) and needed to crawl back on some of my spending, Subscription was the first place I looked.
Step 2: Put in the amount spent on each category
For each line item, list the amount you expect to spend. Some will be based on price quoted by supplier/service provider. Other will be amounts you decide for yourself. Here we are just listing amount paid for each, not worrying about total and balances.
Money Health Check
There is no big secret to sound money management. It is simply:
Spend less than you earn.
The difference between your Income (after deductions) - Tax, National Insurance, Student Loans - and your total expenditure tells you whether your finances are healthy on not.
When we covered categories above we mentioned one of its usefulness being able to see the proportion of each category to the whole. Finding the total for each will give you the reality of where your money is going and allow you to compare categories relative to each other.
Step 3: Calculate your balance.
Finding your balance gives us and indication of what we are dealing with and where to focus our efforts.
You balance is simply:
Net Income (amount coming in) - Total Expenditure (what you have going out)
Net Income: income after tax and other deductions. If you have multiple incomes streams from separate jobs or are a two-income household, then this should include all your incomes.
Total Expenditure: Total (Household+ Subscription + ………)
There are 3 likely outcomes for your balance calculations:
A number exactly zero
A number greater than zero (positive number)
A number less than zero (negative number)
Move on to the Day 2 for next steps.
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Mastering Everyday Money-Day 2
In the next post, we will tackle the different approaches depending on which of the 3 outcomes you had.
It can also be time you spend volunteering.