The 3-Step Simple Spending Plan
Want a simple ‘Spending Plan Process’? – Set up three accounts. These can be three bank accounts or can consist of a cash account or two, depending on what works for you.
Account No.1 – For your automatic monthly withdrawals and monthly bill payments. Your paycheque(s) should be deposited here, you pay your online bills, and “park” the rest in the account to cover upcoming automatic payments. DO NOT USE THIS ACCOUNT FOR MONTHLY SPENDING. Transfer the balance of your pay to Account No. 2 & 3 as noted below.
Account No. 2 – Your occasional expense account. Figure out how much you need for those expenses that come up ‘occasionally”. These are expected expenses like Gifts (yes, including Christmas), car repairs (got a car? Then you’re going to have repairs), vehicle registration, etc. Only use this money for one of these expenses. You may have to juggle between them as you get this account set up. That’s OK. You have to start somewhere. This is Account 2 for two reasons. One, If you wait to set money aside until you have money left over, it will likely never happen. And two, if you do not plan for these expenses, they will come up and set you back OR you will rely on credit to cover them, thus increasing your debt. As you successfully develop your plan, build in an “emergency” fund component for those things that come up that are unexpected. As you heighten your awareness you can continue to create categories for those that qualify as ‘occasional expenses’.
Account No. 3 – For your day-to-day, week-to-week spending needs. This account is for gas, groceries, recreation, entertainment etc. This becomes your “spending” account and can be either a bank account, or cash. I highly recommend you separate it by category (in other words decide how much you are willing to spend on each category). If you are using the cash system, you can use either envelopes or jars to accomplish this. Again, you can juggle from one to the other – if you spend less on one category, transfer it to another. Or…you could save it 🙂 If you overspend one one category then decide which of the other categories you are taking the money from.
The essence of successful money management is simply being aware and making good decisions. We all only have so much money, whether you make $1,000 per month or $100,000 per month and we need to decide where it goes. If you stop paying attention you will likely spend more than you make, creating a dependency on credit, and leading you down an unproductive financial path. Good decision making means you decide where your money goes. If you are spending it ‘there’ then it has to come from ‘here’. Make the decision consciously and avoid the feelings of ‘regret’ that come with poor decision-making.