The final area where I can help you in your Personal Spending Plan is the determination of where to make the changes—where to reduce your spending?
When you review your monthly expenses, classify them into three categories: Committed, Somewhat Discretionary, and Very Discretionary.
Committed items are things on which you are obligated to spend money—house payment or rent, utilities, car payment, car insurance. These expenses are not likely to go away, no matter what your goals are.
The Somewhat Discretionary category includes things on which you must spend money, but which allow you some discretion on the amount. You have to buy food, for instance, but perhaps you could do so more economically.
The third category is the Very Discretionary items, like gifts, eating out in restaurants, clothing, hobbies, snacks, and entertainment. These are the things on which you could really spend a lot less if you chose to, and you want to look here first for money to be reapplied toward your goals.
In this part of the process, you want to reduce the amount you spend on the Very Discretionary and Somewhat Discretionary expenses. First, reduce these amounts so you are at least not spending more than you make. Then, continue to cut back until you free up money to accomplish your goals in the time frame you desire.
Don’t be discouraged if you can’t fund all your goals the first time you try this process. This round is only the beginning, and as you accomplish one goal, that money can be reallocated to the next goal on your list.
Before you reallocate anything, ask yourself, “How much satisfaction does this bring me?” If you have an item for which you spend money that is very discretionary, but truly brings you a lot of satisfaction, then don’t cut that one first. For me, dining out once a week with my family gives me a great deal of satisfaction. If I were to cut that from my spending plan, it would constitute deprivation.
However, I use a great deal of self-restraint when spending money on movies. I don’t buy lattés, and I rarely go out for lunch. I pass up a lot of indulgences to save the money necessary to dine out once a week with my family. Though discretionary, some items on your list may need to be put in the “do not touch” category.
When you decide to cut back in a particular area, try not to be overly aggressive at first. The objective is not to deprive yourself, but to gradually steer spending momentum away from things that are of lower value in your life, and toward your true goals. Put the money where it counts the most, and remember that a little saved in a few areas adds up to a lot each month.
One helpful way to keep your goals in front of you is to put your list of goals on your refrigerator or next to your bathroom mirror. When something on which you want to spend money comes up, take a look at your list. Ask yourself, “Is this new leather jacket more important than saving to go to Europe?” By keeping focused on your goals, passing up that leather jacket will not seem like deprivation.
It’s all about personal choices based on facts—not sacrifice. It’s about funding your goals and living a life right now that is consistent with what is important to you.
When compared with the amount of knowledge most people have of their personal finances, just finding out where all your money goes in a month is a major accomplishment. To follow through by identifying and writing down your goals is even rarer. To complete the process by reallocating your spending to reach your goals—well, happy are the few who dare to venture this far.
Try it. The journey will be worth it.