One of the fastest ways to gain control of your financial life is to create a spending plan. When you know exactly how much money you need each month to pay your bills, you’ll be able to identify where you may be spending too much. Last week, our assignment was to complete a Zero-Based Budget. Some of the assignments were perfect. Some of them made me think we need a different way to frame the power of a spending plan. This week’s episode is my attempt at illustrating the power of spending plans by using what I call The Blueprint for Financial Success.
How Your Spending Plan Makes You Powerful
One of the fastest ways to gain control of your financial life is to create a spending plan. When you know exactly how much money you need each month to pay your bills, you’ll be able to identify where you may be spending too much. You’ll also be able to better distribute the remaining amount on paying down debt, saving up for future needs, and other purchases – like recreational items and vacations. After all, it’s your money – shouldn’t you tell every dime of it where to go every month?
What Your Spending Plan Does for YOU
- Eliminate Stress
- Gives you a sense of Empowerment
- Clarifies your financial condition by comparing your income to your expenses
- Helps you avoid overspending
- Shows you low-hanging fruit for saving money
- Breaks down your expenses into categories to help you better understand your spending habits
- Establishes financial control and direction by
- Help you save for emergencies
- Help you achieve your goals
Your Spending Plan is Your Blueprint
Rafe and Liz had been dreaming about building a new house since they got married fifteen years ago. When they went on vacations, they often drove through nice neighborhoods in distant cities to get more ideas. They devoured magazines for design concepts for houses and landscaping, and they talked endlessly about the kind of house they wanted to build. Thinking about their dream house was almost a game to them, and they enjoyed it.
During those years, Rafe was promoted several times, and each time, they got a little closer to the point of saying “yes” to build their home. Then, Liz received an inheritance from her grandmother’s estate, just enough to give them a sizable down payment. That did it. They were ready!
They kicked their planning into high gear. Instead of dreams, they now started making plans. Suddenly, they realized they had to make some decisions—some hard decisions—about what’s most important to them. They quickly understood that those years of dreaming about their ideal home would have to be tempered by the reality that they couldn’t do everything they’d ever wanted to do. After all, people worth millions of dollars owned many of the houses they’d seen. Rafe and Liz had significant resources, but not millions.
Liz loved to entertain, so having a nice dining room was important to her. Their daughter was in middle school, and their son was in the fourth grade. Rafe enjoyed playing soccer and baseball with his son, so he wanted a big backyard. They both wanted their bedroom to be a long way from the kids’ rooms. They looked at plans for a 4000 square foot house that had a large dining room, but if they built their house that large, they could only afford a small lot that wasn’t in the school district where they wanted to live. As the days went by, they had to talk through their hopes and dreams, and they both had to be willing to compromise. After weeks of long and occasionally intense conversations, they realized that one of their biggest priorities was a game room. Their children would be in middle school and high school in the coming years, and they wanted a place where they could bring their friends to hang out. The process of planning may have dampened some of their dreams, but it crystallized their real desires for their family.
They hired a builder who had some great house plans, and they were able to tell him exactly what they could afford and what they wanted. Soon, they decided on a plan, and they picked a neighborhood that wasn’t what they had dreamed about, but it fit their newly clarified goals.
The process Rafe and Liz experienced in building a home is a perfect analogy to creating a sound, effective financial plan. For that reason, I call this process “The Blueprint for Financial Success.”