The essence of a WHAT?!?!?  Did you just miss something, or are am I giving you another name for a budget?  Yep I said it, spending plan.  What it does for you is help you find the money you keep telling yourself you don’t have by allocating your spending to what is important first.  What happens if my spending totals more than my income you ask?  Then it is time for some difficult questions, about what is important and frivilous, and how is it that you think it is OK to spend more than you make.  Well, for everyone who isn’t upset, disgusted, or just think they know better, I’ll explain below.

The basic premise, is to look at your income, divide into appropriate amounts, and use that money to pay the corresponding categories.  We know we should be saving at least 10% towards retirement, 10% unexpected expenses, 10% long term savings & future goals, and 10% reward/fun money.  A quick bit of math shows that this is leaving 60% of our income covering our commited expenses.  An internet search for The 60% solution will take you to Richard Jenkins concept. 

I think this is a good philosophy, but it challenges the fact that most people are using much more than their 60% for commited expenses.  What suffers is not the fun money, but retirement savings, future goals savings, and unexpected/emergency savings.  This is where the hard questions come in, starting with the two largest expenses most people have, home and car.  Can you really afford the mortgage/rent that is more than 30% of your income, and is your car payment reasonable?

So how can you work out a spending plan?  Start with your income ideally, and allocate percentages as described above for the various categories.  If there is not enough income, consider downsizing those components, or figure out a way to increase your income (I know, both are easier said than done).  Look at this example:

$3000 of take home pay monthly:

• save $300 towards retirement
• save $300 for emergencies (until you have 3-6 months savings set aside)
• save $300 for long term goals and opportunities
• give yourself $300 in spending cash – deduct savings for big ticket special treats for yourself from this category
• the remaining $1800 should cover your fixed expenses, housing, car, utilities etc.

One thing I like to do, is pay these categories, as I get the money.  As I’m paid (weekly) my montly savings amounts divided by four are accounted for the appropriate categories.  This keeps all my savings “on time” and as an added bonus gives me four additional paychecks per year.  Bi-weekly people will get two bonuses/year, unfortunately this deal doesn’t do the same for folks on montly pay.  This way, I truly do pay myself first, all my bills get paid too, and I’m well in touch with whether or not the money is there for a purchase I might be considering.  I have all this automated with my ING DIRECT account (see link below), then I get a little extra since it is an interest bearing savings account.

The Orange Savings Account. Great rates, no fees, no minimums. 

So the introduction to this category states that I some experience the world of financial planning.  You don’t need to go that far to get some of the same information that I learned.  In fact, if you care to read anything about finance, you will surely find at least 1 (likely many more) article which says in the US maybe 3% of the population saves enough money.  After interviewing hundreds of people about their situation, I can assure you, these numbers are pretty accurate.  Try and get someone to “not spend” some of their money today, so they will have some tomorrow and many will look at you like you are speaking in tongues.  So, the first thing you should think of doing is save money.  In fact, here is rule #1:

1.  Save, save, save, save, and save.

Even though it has 4 letters, the word “save” is your friend.  Is there anything I can do to make this clearer?  You might be saying “I can do that, but where should I save it?”  This will be covered in future posts.  Another thing you might say is “I’m using it all, how can I save any?”  This tends to be the trouble for most people.  Usually, it comes down to our daily choices.  I recently heard a friend say that hey uses his debit card as many as 18 times per day.  Of course this will use up all your money.  He was shocked to hear that there are days when I don’t spend any money.  It’s a game I play.  I spend for the things I need, and prioritize for the things I want so that I do the right thing.  Let’s look at the overused “Latte Factor” scenario. This basically says that for every latte you skip in a week you have reduced your spending by $4/latte.  If you skip one, you save $4/week, $16/month, and $192/year.  Or if you skip 5 the numbers are $20, $80 and $960 respectively.  OK, so now we are talking about an extra (almost) $1000 per year potential, from skipping lattes.  This really doesn’t address the issue correctly.  What if we did an inventory of the items we have to spend money on each month, totaled them up, and included our savings goals there?  Then any leftovers (hopefully there are some) are our allowance each month?  As a population, we are looking at trying to save money; after we do the thing we want and buy the things we want.  Let’s learn the distinction, between needs and wants.  Put the needs first, including some savings for yourself, emergency fund and future.  Then rank your wants, by importance, so you know which ones you can let go. I’ve recently restructured my own spending, and it has had a noticeable effect on my savings goals.  My next post will include some examples of this, but focus on the needs and wants, and make sure you know what wants are important enough to save for.

Hmmm… I’m glad you asked. Originally financial concepts caught my attention as they pertain to my own situation.  Then I undertook financial planning as a profession.  Learning what I could about personal planning, people, and the interaction between the two was quite an experience.  My main goal was to help people make better choices, and that will be the focus of any financial topics I choose to write about here.  I no longer am in this profession, and feel it is appropriate for me to provide an opinion based on my experience from both inside and out of the financial planning world.  General concepts are all we shall cover here.  If you are looking for recommendations to buy and sell individual investments you may be in the wrong place.  I regularly read from a wide variety of sources and plan to open discussions on the important issues I find.  I’ll provide reminders for sound personal financial practice throughout the year.  If you value overall financial health and security, please come back.  I’ll do my best to give you some good ideas.