Creating and using a spending plan is more about managing behavior than money. What the spending plan does is help you to reach your financial goals. Money is the tool a spending plan uses to achieve financial goals. Below are some common mistakes when creating a spending plan.
Starting to create a spending plan without clear goals.
Clear goals make it easier to prioritize spending and ensure you’re on track. A spending plan’s goal must be what you are spending or saving money for. Before you save for a house, you should know what the type of house in the neighborhood you want to live in will cost. If you are saving for retirement, you should understand what you need to have saved by the age you plan to retire to afford the lifestyle you want. When starting a business, you should know how much you will need to spend upfront. The goal should never be about dollars but the purpose and reason behind the dollars.
Creating a spending plan without first tracking spending.
Tracking spending allows you to know where your money is going. When you do not following how much money is spent can make it hard to stick to a spending plan. I believe that if you do not track your income and expenses, you are not successfully managing your money because you do not know where you are spending it; you do not know where it is going, and therefore you cannot – effectively manage it.Tracking your spending helps to make your money, and you’re spending more real. You will begin to see it come in and go out and see it as a tool to help you achieve your financial goals.
Forgetting about small expenses.
It’s easy to overlook small, recurring expenses that add up over time, like the donut shop or vending machine. Be more aware of transactions that are quickly forgotten. Some online transactions, transactions without a receipt, can be soon forgotten. Take special steps to remember these.
Get a receipt or find a way to track expenses, even the small ones. There are only so many places where you can spend money and not get a receipt. If they do not give you one, ask for one. Additionally, make it a habit of putting all your receipts or log of expenses where you can find them.
Creating a spending plan without having an emergency or contingency fund.
Without an emergency fund, unexpected expenses can derail a spending plan. It may be the most significant difference between those who manage to stay afloat and those who are sinking into worse financial debt. Emergency savings of 3 to 6 months of expenses allows you to meet unexpected financial challenges. The emergency fund not only allows you to cover these expenses but also gives you the peace of mind that you are prepared for financial emergencies that will arise.
Not reviewing your spending plan periodically for needed adjustments.
The spending plan process is living and breathing, and your spending plan needs to be checked regularly to ensure it’s still doing what you want it to. As a financial coach and counselor, I encourage clients to pick a day, choose a time, and prepare a place to work on their money, and then consistently work on their money during the time and place they choose, creating a habit.
Changes in your family situation, such as a child, will significantly impact your spending plan, and It’s essential to adjust spending plans accordingly. Remember that your spending plan is an estimate of how you will spend your money, so as your situation and circumstances change, your spending plan should also change. Spend time working on your money and adjust your spending plan as circumstances change.
Building a spending plan without regular savings.
Your spending plan must include savings that connect back to your financial goals, such as retirement, emergency fund, or other long-term goals. Your spending plan should have two or three categories: fixed, variable, and possibly occasional expenses. Once you allocate money to your fixed expenses, your first variable expense should be savings. Your savings is a variable expense, so it could be more one month and less the next depending on other things going on in your life.
What is your why? Determine why you are creating a spending plan as it will help you avoid the common mistakes when creating a spending plan. Often people will make a spending plan because they want to get out of debt, save for retirement, or manage money better, but a spending plan is about your current situation also. Your spending plan should also make sure the life you are living currently is fulfilling. Just don’t plan to purchase a house or plan for retirement, plan for the other aspects of your life as well.
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