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5 Steps to design your spending plan

The article, Why you do not need a Budget, clearly discussed why you do not need a budget, and we discussed certain types of spending. We encouraged you to rather plan your spending than setting up a budget. Today I am discussing the top 5 tips for designing your spending plan.

As humans, we often downplay things when it comes to our money. A great example of this is the age-old consumerism trick where they advertise something for R 999 because, in our minds, we automatically think that it is less than R 1 000, so it’s cheap, or now I can afford it. We do the same when it comes to planning our spending. We look at the first one or two numbers. So, for instance, if a debit order is R 1 499, we typically say it’s R 1 400, and then we are confused when all our money is gone at the end of the month.

Step 1: Use the data

Most of us swipe or tap our cards for just about everything, including parking. When you design your spending plan, start by using your bank statement from the previous month and slot the figures into the right category. Once you have completed this the hardest part is over. You have started and now you already have some sort of an idea of where your money goes. Do not use the bank statements for abnormal months, like months where you were on leave, where it was an important birthday or something big happened. Remember we are creatures of habit, and starting on a skewed view will only complicate the process further down the line.

Step 2: Create your overall categories.

In Why you do not need a budget, we categorised spending into four categories, namely fixed spending, necessary spending, social spending, and luxury spending. You now need to classify each of your main categories in step 1, into these four categories. Remember to be honest with yourself. There is no point in classifying a spending item as necessary spending when it is not. It will only complicate the process further down the line when you need to make decisions based on your spending.

Step 3: Determine where you need to cut your spending.

Compare your spending to your income. If you are spending more than what you are earning, start by cutting down on your luxury spending. If that is still not sufficient, see if there is any of your social spending that you can cut back on. You want to avoid cutting back on your necessary spending as far as possible since this will have the most impact on your survival.

Step 4: Breaking it down

For luxury and social spending, it is very easy to overspend as it generally happens in the spur of the moment. By breaking these expenses down into smaller pieces, like weekly units, you will be able to create a control mechanism for yourself. The difficulty in this is changing your behaviour. If you have overspent in one week, you need to ensure and commit to yourself that you will spend less the following week. The opposite is also true, where you are underspending one week, does not mean that you have to overspend the next week. The idea is to get you to spend less and save more.

Step 5: Tracking your spending.

Because your fixed spending will not change, that is one area you do not need to track. Your necessary spending will have certain of those expenses that will only occur once a month and therefore you will be able to track that easily. The other expenses, including the necessary expenses that happen more than once a month, for example, your groceries, etc. will have to be measured in weekly or bi-weekly hurdles to ensure that you are keeping track the way you should. The easiest way to ensure that you do it and that you keep yourself accountable is to send yourself a calendar invite to remind you. This will not only help you schedule time in your diary, it will also be a reminder for you to do it.

In conclusion, if you want to be in control of your money, you have to start somewhere and take action. If you do not change your behaviour, you are not able to change the direction to where you want to be heading. Tracking your spending on the items that you are more likely to overspend on, is the simplest and fastest way to start taking control of your finances.