As the financial year 18-19 has just started, it is time to get a grip on your tax and investment planning for this year. The consequences of not having a financial plan in place or updating your plan regularly can be extremely damaging for you and your business. So, while you are thinking about budgeting, let me tell you that the traditional way of categorizing your money and trying your best to stick to it, doesn’t usually inspire long-term changes in financial planning. Instead adopt a gentler and more proactive approach of creating a spending plan to improve your finances.
Spending plans, although not a new concept, is a less rigid option than a budget and is based on reality and is in no way designed to limit our spending in any category. Drawing up a spending plan will give you control of your expenses and clearly show how much money you have coming in, what are you spending it on, and where you can make trade-offs to come up with the extra cash. Below are the steps that would help you in creating your own spending plan:
Determine your Values
The main purpose of a spending plan is to determine what you genuinely enjoy spending money on and recognizing your values. Lots of research shows that spending on “experiences” makes people happier than acquiring things. But if buying that pair of Christian Louboutin shoes makes you happy, go for it. Analyze your recent unrestricted spending patterns and try to be as objective as possible. It is better to accept it and plan for it rather than judging yourself for being materialistic and living in denial. This will also help you in recognizing expenses that you wish you could care for but actually don’t. Like cooking, I wish I could be a creative chef, but I am actually a grouchy one and I’m perfectly content with eating cereal for every meal. Thus, I can save on groceries and redirect that money towards something more rewarding (shoes!). I know shoes don’t feed the stomach, but it feeds the soul, pun intended!
Make Lists and Keep Checking Them
Make a list of short-term goals and long-term goals. This will keep you motivated for saving. If you want to buy something, put it in the short-term goal list, and reward yourself with it once you have saved enough. You have to let yourself off the hook every once in a while but make it a part of your plan. For your long-term goal list, keep it as concrete as possible. With the earlier step, you distinguish your values, now you have to create a vision for that. Whatever it is that you want, imagine what your life will be after you have achieved it. This will keep the excitement up and make it more tangible.
Add it all Up
Back in reality, you have to pay your rent, other bills and buy groceries (cereal). These fixed costs need to be paid on time and in full. So, as a general rule of thumb, remember that the discretionary funds usually should not exceed 30 percent of your income. Your 20 percent should go to long-term savings like retirement and 50 percent to the fixed expenses. Now, also remember that we are social beings, and you have probably planned a few dinners or weekend trips. A good strategy is to plan out an approximate expense for each plan and move it into a separate account so that they are accounted for. Another great strategy, if you have overspent already, is to meet your friends for coffee instead of dinner or chill at home for a weekend.
Be Aware of the Patterns
Many people think that they have financial troubles because they can’t control their spending. But usually they are acting on the unconscious beliefs about money that they learned early on in their childhood. Are you doing exactly what your parents did, or exactly the opposite? Analyzing the more complex psychological elements of your behavior will help you understand it and learn how to keep it in check.
Conclusively, a spending plan is an organic document that will change with your needs and situation. One of the reasons why budgeting fails is that you think that they won’t, and when the willpower weakens, you throw your hands up the air and give up for good. Your reaction to failure and making changes accordingly is an essential part of your progress. The sooner you can stop beating yourself for overspending, the more quickly you can plan your improvements.