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The Spending Plan

A spending plan always works. It captures the cash that slips through your fingers, unnoticed, every day. It discriminates between what's important to have and what you buy because it's there. It rescues you when your income falls short. It lets you save money painlessly, and that's the truth.
— Jane Bryant Quinn

If you arm yourself with only one weapon in your fight for financial control, make it a spending plan. (Or you can call it a "budget." That works, too.)

What's a spending plan? Well, more than anything, it's an active strategy for ensuring that your finances are better tomorrow than they are today.

A spending plan means directing your efforts toward a financial end, a money goal. You're mapping out just how to get wherever it is you want to go. "I'm tired of worrying about finding money to pay the bills," you might think. Or: "I'd sure like to see this credit-card payment go away." These money problems, and tons of others, can be overcome simply by (1) building a spending plan, (2) implementing it with diligence and realism, and (3) giving it time.

With the proper execution, a spending plan can accomplish near-miracles for you. But first you'll want to know a few things about the world into which you're bringing your spending plan. Then you get to exercise a little creativity, and give your spending plan its birth.

After that, you just listen to what it's telling you. Take notes. Trim the edges. Make changes.

Week by week, month by month, year by year ... watch it work.

But First ... The Spending Record

In order for a spending plan to work for you in the future, you have to know how you handle your money in the present. That means you need to know what you're spending money on today, this week, this month. You need to know which fixed expenses (electric, gas, cable, rent, etc.) will come to you every month, without fail, and you need to know their amounts (average, if not exact). You also need to know the various non-fixed expenses that siphon up chunks of your income each month, without fail: groceries, auto fuel, household items, medical needs, and so forth. You need to get a grasp of your spending patterns and habits, both good and bad.

If you've been using Quicken or Microsoft Money for any length of time, then you probably already know this stuff — or else you can get to the information easily. (In Quicken, for example, running "Cash Flow Reports" for specified time periods will give you the necessary categories and average dollar amounts from which to build your initial spending plans.)

If you haven't been using a financial program to track your account balances and spending categories, then you'll have to put the creation of your spending plan on hold for a month or two. Instead, you're going to learn how you spend your money, and what you spend it on. And you'll do that by using your Spending Record.

For at least one month, carry a small notebook in your pocket or purse. (If you have one, a PDA will work also.) Hour by hour, day by day, write down every single one of your expenditures. Let no expense slip through undocumented. No amount of money is too trivial to mark down, so don't even think about letting the 50 cents you pay for your afternoon can of Dr. Pepper hide from your Spending Record. The discipline with which you construct your Spending Record will determine the level of truths it will unlock for you down the road.

Detail is key here, to be sure. But a trip to Wal-Mart doesn't mean rewriting the foot-long receipt into your notepad. Rather, you'll just break it down into categories like "grocery," "baby stuff," and "household." Mark these spending categories down in your notebook, along with their corresponding amounts. (Although if you want to break such bills down further — "groceries" might be further subdivided into "junk food," for example — then you can. After doing this for a few months, you'll have a good idea which categories would divulge more info by being split into smaller categories.)

Once you've done this for a seven days — and done it diligently — you then set about turning your work into useful information: You simply total up your categorized expenditures for the week. So how much did you really fork over for groceries? Household items? Student loan dues? Computer games? Credit card dues? Cable? Water and utilities? Clothes? Eating out?

Do this every week, for one month. (Some people insist on keeping no more than four Weekly Reports in each month, so their last "week" of the month may have 7 to 10 days in it.)

Now, on a separate, full-size piece of lined notebook paper, you will create your full-fledged Monthly Spending Report. List all your fixed recurring expenses down the left side of the paper, along with their corresponding amounts.

Move over a bit and make another column down the sheet, this time listing all your non-fixed other expense categories. Write the corresponding amounts next to each one. Now total up each column and write these totals down. Total up all your expenditures, and write this number down.

Here's where it gets interesting. Turn your Monthly Spending Report over. Drag out pay stubs and bank statements if you need to, and pencil in your take-home (net) income for the month. Include all of it: wages, bonuses, dividends, interest, rental income, Bingo winnings, everything. List it all out, and then tally up all your income for the month.

Now, keeping yourself a safe distance from any sharp objects, firearms, or toxic chemicals, compare your expenditures with your income. (Yes, Virginia, this could get ugly.)

Whether your personal finances for the month were in the red or in the black is, at this point, irrelevant. What's important is that you just joined the small and exclusive club of people who know, beyond a doubt, exactly where last month's money went.

That is, in itself, a small degree of financial power. After all, your problems are likely staring you in the face, evident in the numbers on the page. You now have some idea of your spending patterns — and why any concerns need to be corrected as soon as possible, in order to make your life better.

That's where the Spending Plan comes in.

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