The first step in developing a Personal Spending Plan is to get very clear and be very honest, about the facts—finding out exactly where all your money is going.
List all your monthly expenses on the Monthly Expenses Sheet found in Appendix A—not what you think they are, but what they actually are. Some parts of this process are easy. There are things like house payments and car payments that rarely change. Then there are things like groceries or utilities that tend to go up or down, depending on the time of year. For these variable items, I suggest you calculate the average amount spent over a period of three, four, or five months.
Go through your checkbook and write down every penny that you spent over a three- to five-month period; then do the same with your credit card bills.
For cash expenses, like eating in restaurants, parking, dry cleaning, and your morning latté, you may need to make an estimate— but be as realistic as possible.
I love to ask clients how much money they withdrew the last time they used an ATM and what they spent it on. Rarely, if ever, can they say where it all went.
Keep track of what you spend cash on for a week or two, and then extrapolate this spending to give you a monthly amount. Morning coffee is $3.50 a day, parking is $9. Lunch out is $8.50, the afternoon snack is $3, and dry cleaning is $10 a week. Dinner out two nights a week, that’s $40. Entertainment is $25 a week. Add all this up. It works out to over $800 a month! And we wonder where our money goes.
Even if you don’t want to keep track of your cash expenses for a week’s time, at least sit down for five minutes and estimate what you need on a daily basis for cash items. Include this amount in your Monthly Expenses Sheet.
Ideally, it would be great if you kept track of your cash expenses on an ongoing basis. But if that is too much for you, at least get it accurate once. This way, you have a place to start, and you can include that figure in your Monthly Expenses Sheet.
You could even use this information to add a little bit of discipline to your life. Once you get a figure for cash items for the week, go to the ATM or the bank at the start of each week and give yourself that much money—but that’s all you get for these items for the week. You have to make it last. That’s what you get for eating out or movies, or whatever you spend cash on. No more asking for additional cash back on your debit card during the week—just to have cash in your pocket or to make up for buying that watch you just couldn’t pass up.
I like to ask clients what amount they believe they spend on dining out per month? Invariably, they underestimate this figure. At seminars, I ask people to tell me off the top of their heads how much they spend in restaurants. People might say that they spend $150 a month, but when they go back over the actual expenses from their credit cards and checkbooks, they usually find that their restaurant bills are much higher.
No more than three times in all the years of giving seminars has somebody nailed right on the nose how much he or she actually spends in restaurants. Estimate this figure realistically by answering the following: How many breakfasts do you buy in a week, including weekends? What is the average amount you spend? Do the same for lunches and for dinners. Be sure and include drinks, dessert, and tips. Multiply the weekly figure by four to get the monthly amount you are spending.
If you are like most people, what you spend eating out will probably be higher than you thought. But at least you’ll know it’s accurate, because it is based on the facts.
Another favorite line item on the Monthly Expenses Sheet is for personal hobbies.
Once at a seminar, one of the wives in the audience asked me to question her husband about how much he spends on his favorite hobby, fishing.
I almost had to pry it out of him, because he was sure that whatever number he came up with, it would be taken away from him in next month’s spending plan.
Finally, he said “Oh, about $35 a month.” His wife laughed. “Well maybe $50,” he added. She laughed again. He really didn’t know. I told him to go back over the last five months of expenditures and get a “fishing hobby” figure to put into their Monthly Expenses Sheet. Only by knowing how much he actually spends—on his rods, reels, wading boots, and fishing hats—can they begin to know for sure where their money goes.
You need to write down everything that you spend money on. I know this sounds like a daunting task, but your Monthly Expenses Sheet needs to include everything—mortgage payments and real estate taxes, retirement and college funding, insurance on your home and family, health insurance and doctor’s bills, transportation (including parking, licenses, and repairs), the amount you repay each month on credit cards, utilities and repairs, groceries, dining out, clothing, entertainment, recreation, gifts, gardening expenses, vacations, children’s allowances, school expenses, taxes, contributions, dry cleaners, haircuts, postage, newspapers, baby-sitters, counseling and massage sessions, pets, diaper service, music . . . all the expenses that consume your hard-earned money. Just write them down and don’t decide yet whether you can afford them or not.
If, once you have them written down, they add up to more than you make, don’t change the numbers! That is the natural response. “This shows I am spending $3,500 a month and I am only bringing home $3,000. So I’ll only spend $200 on meals out, not $350. I’ll only spend $275 on groceries not $425. . . .”
Don’t touch those numbers! Don’t try to force them to balance. We need to complete an exercise in goal-setting first. Afterwards, we will have a chance to revisit the fact sheet.
People often resist this exercise because they think if they add all this stuff up they won’t be able to continue doing the activities they so enjoy. They assume they do not have enough money. The obvious response is not to keep track, but to make more money. They equate keeping track of their spending with budgets, and budgets are about deprivation.
A Personal Spending Plan is not based on deprivation.
In a Personal Spending Plan, determining what you spend your money on is only the first step. It establishes a foundation for your Personal Spending Plan based on facts so that you can then go on to step two.
Step two is to incorporate your life and financial goals—your dreams and passions—into your plan. So let’s do it.