7 Tips for Creating a Successful Spending Plan

Couple discussing budget
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With prices rising, it is even more important that you have a financial plan. Whether you call it a budget or spending plan or something else, a plan is key to financial success. I'm going to use the term spending plan because many people have a negative reaction to the word budget, but they mean the same thing. They're simply a plan for where your money is going to go.

Most of us have tried building spending plans before, and sometimes things haven't gone so well. Here are some of the most common spending plan mistakes and the solutions to avoid them.

Know Your Motivation

Motivation is the key to all action. Find your financial motivation by finding out where you are right now. Sit down and make a list of your assets (things you own) and liabilities (things you owe.) Then make a list of your income and bills each month. This is often uncomfortable. Just sit with it a bit.

Now envision how you want your financial life to look in five, 15 or 25 years. Maybe you want to buy a house or help your kids pay for college. For me, the first motivation to manage our money was simply that I didn't have to count pennies at the commissary. How does your current situation help you reach your desired future?

Knowing why you care about your money is the first step in doing everything else. Your spending plan will fail if you don't have any motivation to stick to it.

Build in a Little Bit of Fun

Everyone needs to have a little money that they can spend freely. Give yourself (and your spouse, if you're working as a team) a spending allowance that is judgment-free. It might be $20 a paycheck, or it might be $200 a paycheck, whatever you decide (and can afford). This is the money that you can blow through, but when it's gone, it's gone. Decide what kind of spending needs to come out of fun money. In my house, it is fast food and any sort of "going out with friends."

Plan for Everything

Another way that spending plans can go wrong is not to account for everything. I've seen tons of spending plans that don't include clothes, health-care expenses, car registrations or any fun at all. That's just not how life works, and those plans will fail. You need to plan for spending that is going to happen.

Not every expense will happen every month, and that's OK. That money can build up in your savings until you need it. Say you budget $50 a month for health-care expenses. You might not go to the doctor for three months, but if you've put that money aside, you'll be ready for a co-pay and a prescription cost.

Plan Big, Spend Small

A spending plan needs to be realistic to work. Many people balance their income to their expenses by planning at the low end of every cost. For example, let's say you usually spend $600 to $800 on food each month, so you plan for $600 because you're going to try really hard. What happens if you actually have an $800 month?

The golden rule of spending plans is to estimate at the higher end of the range. If you actually spend less, woot! That can go to paying down debt or into your savings account. Otherwise, you plan to spend only $50 on car maintenance and then you need two new tires, and now your whole plan is shot. Which brings us to ...

Have an Emergency Fund

You need an emergency fund. Emergency funds can fill in the places where your spending plans aren't quite there, and they can also help with true emergencies. Start by shoveling every single extra dollar into an emergency fund for a month or two. Make a small goal to start, maybe $1,000. Then add to it every month. Cut back on groceries. Dog-sit. Don't eat out for a month. Give plasma. Sell stuff. Whatever. Someday in the future, you're hoping for at least 3-6 months of living expenses, or possibly more.

If you're a homeowner, you might want more money in your emergency fund, because as we all know, houses eat money.

If you are in the military, you're eventually going to want to build your transition fund to provide a financial cushion for the time when you leave the military.

Plan for Surprise Income

It is surprising how unexpected money coming in can mess with a spending plan. So plan for that, too. Maybe it's a birthday check from your mom or an income tax refund. Think now about what you'll do with extra money.

Take a portion for fun. That might be 10% for an income-tax refund, but 100% for a birthday check. Then know where the rest of the money will be put so that you don't accidentally let it go somewhere else.

Some good places for unexpected money are paying down debt, beefing up your emergency fund or saving for anticipated future spending (like that new sofa you are going to need after your next PCS.)

Another trick with things like birthday money is that there can be a risk of spending it more than once. How? Let's say your mom sends you a check for your birthday every year. Your birthday isn't until next month, but you see a new pair of boots and you think, "This will be my birthday money." So you buy them. Then, when your mom actually sends the money, you think, "Oh, I have this unplanned money to spend." And then you spend it again.

Get Help

You might benefit from working with a financial counselor. Your installation probably has one at the family support center (Army Community Service, Navy Fleet and Family Support Center, Marine Corps Community Services, Air Force Airman and Family Readiness Center). You can also get telephone or internet-based coaching from Military OneSource.

If you have days where you're worried about money (who doesn't?), then these steps will help make that worry a little smaller. You can do this.

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