How did Part 1 go? If you haven’t had a chance to read it, go ahead and take a look before moving on. Hopefully you understand why you need a spending plan and had an opportunity to get some numbers together. Here’s what you do when you’re ready to move on to the next step.

“A” IS FOR ASSESSMENT

As noted previously in our example, Dr. Jones has $80,900 in annual fixed expenses.  This is money that is already spoken for.  Looking at this from a different perspective, this amount represents what you choose to prioritize in life.  In her case, she has chosen to prioritize owning a certain type of house, owning a certain type of car, having children, having a gym membership, giving to charity, and saving money.  Look at your own spreadsheet.  You will have different priorities than Dr. Jones.  And that’s okay, because the point of this exercise is to make you aware of what you’re prioritizing right now.  You may look at your numbers and be completely fine with how your expenses align with your priorities.  Or you may look at your numbers and be horrified.  Most of us will fall somewhere in the middle.

Now Dr. Jones is currently tracking her flexible spending, which is what you choose to spend after accounting for your fixed expenses.  These expenses, just like your fixed expenses, will say a lot about what you prioritize and value.  In fact, these numbers may be even more indicative of what you value because you have complete and total control over how much you are spending.  There is no travel business that requires you make payments in order to pay for your vacations.  There is no “dining out” business that requires you pay them for the costs of eating out. There is no clothing business that you pay automatically via credit card each month in order to buy your clothes (unless you buy clothes via a monthly subscription such as Stitch Fix- in this case,  you would have included this expense under monthly fixed expenses).  If these expenses are extremely important to you, then you need to set aside money each month in order to cover these expenses.  Tracking your expenses will allow you to do this in a rational  manner.

Let’s analyze the flexible spending amount a bit more, using Dr. Jones as an example.

Annual net income – annual fixed expenses  (annual monthly fixed expenses + annual irregular fixed expenses)= Annual flexible spending amount

$100,000-$80,900 ($66,600 + $14,300) = $19,100

Thankfully, Dr. Jones has a positive number.  This means that she has a bucket of $19,100 to use for flexible spending for the entire year.

RECALIBRATION

You will absolutely have to recalibrate your numbers as time goes on.  To go from being completely clueless about how you’re spending your money to tracking every dollar is a big task, and it will take time to get this to a point where it becomes second nature.  We also have to be mindful that life circumstances change all the time.  As I’ve said before, be patient and don’t be too hard on yourself.  Instead of being intimidated, use these numbers as fuel for your motivation to take control of your finances.  It’s all about those baby steps, because those little steps will get you to where you need to go.

Dr. Jones tracked her flexible spending for a few months and averaged $400 a month on groceries and $100 a month on gas.  She decided that she wanted to move these numbers to the “monthly fixed expenses” category because these are considered needs, not wants.  Let’s recalculate her annual fixed expenses.

Groceries: $400/month, or $4800 annually

Gas: $100/month, or $1200 annually

Now her annual fixed expenses are:  $80,900 + $4,800 + $1,200 = $86,900

Because we changed this number, we will need to re-calculate her annual flexible spending amount, which is the money that she will have leftover after her fixed expenses.

Her new annual flexible spending number is:   $100,000-$86,900= $13,100

Now she can count on a bucket of $13,100 to use towards flexible spending for the entire year.

GOING FROM ANNUAL TO MONTHLY

Most spending plans focus on budgeting monthly.  The reason that I am looking at this from an annual perspective is because monthly expenses can vary quite a bit.  This allowed me to look at the bigger picture and account for all of those irregular fixed expenses from a bird’s eye view.  Once I could look at the big picture, I could then focus back down to monthly expenses.  An easy way to see if you’re on track to spending within your flexible spending number is to divide the annual number by 12.

In Dr. Jones’ case, her monthly flexible spending number is: $13,100/12= $1,091.67

Pay close attention to this number.  Whatever she spends on top of her fixed expenses should add up to around $1,091.67 per month.  This will include categories like eating out, entertainment, travel, gifts, etc.  Is this enough?  This will be completely up to Dr. Jones and how her family chooses to spend their money.

A little trick that I use to keep track of our flexible spending is to put these expenses on dedicated credit cards. Personally, I have a card that I use for just groceries and gas, and then another card for everything else.  Then once a month, I can take a quick look at our credit card bills and see if we are in the general range of our monthly flexible spending number.  And hopefully, I can get some good bonus points through my credit card at the same time. 

**DISCLAIMER: If you use this little hack, it is CRUCIAL that you pay the balance in full every single month.  If you’re carrying credit card debt, then this defeats the whole purpose of this exercise.  I wouldn’t recommend using a credit card if you already have credit card debt.**

For those that are anti-credit cards, I get it.  It has been shown that using credit cards can lead to more spending. For me (and probably for many of you out there), credit cards are simply a very convenient way to pay for things.  If you don’t like to use credit cards, then you will have to get really good at tracking your receipts.  As mentioned in Part 1, you can look into Mint, YNAB, and EveryDollar.

PUTTING THE “FLEXIBLE” IN FLEXIBLE SPENDING

So now the Jones are set.  They have a monthly flexible spending number of  $1,091.67.  They look at their credit card statements once a month and make sure that the final balance is somewhere in the range of their magic number.  Why not be dogmatic that their flexible spending cannot go over this magic number?  Because it’s FLEXIBLE.  I would expect that this number will go over some months and under other months, but as long as you are averaging your monthly number and don’t go over your ANNUAL flexible spending amount, then you are good to go.  

How to account for those months that you go over by a lot?  If you have very large irregular expenses, you should establish a sinking fund.  This is basically a savings account for those large, irregular fixed expenses that have an annoying habit of throwing your monthly spending plan out of whack.  If you know that you want to contribute to your IRAs ($11,000) in January, then you need to set aside $1,000 a month into your sinking fund starting the February of the previous year.  By the time January rolls around, you will have $11,000 that you can easily use to fund your IRA’s.  Remember, you ran your numbers already , so you should theoretically be able to afford setting aside $1,000 a month for this expense.

Your sinking fund must be kept separate from your emergency fund.  Your emergency fund is for….wait for it….emergencies.  You know, when you need to replace your washer or you find out that your dog needs a TPLO (!).

Now, if the Jones keep tracking month to month and they are consistently going over $1100, they will need to figure out how to cut expenses (or increase income).  Since you’re tracking your spending, it will be easy to find out exactly where you are spending your money.  Actually cutting your expenses will be the difficult part.  

Or if you are within your flexible spending amount, you may need to continue recalibrating.  If you find that travel is always taking up a big chunk of your flexible spending and you are determined to travel no matter what, then account for that by moving the travel category from your flexible spending to your fixed expenses and set up a sinking fund for travel.

BUT WHAT ABOUT LOANS?!?! 

Did anyone notice that I did not include student loans? Or any other debt besides a mortgage? Ha- almost tricked you!  Because I’m willing to bet that most of you owe more than a mortgage.  Now what if this lovely family had a mountain of student loans, credit card debt, AND a car payment?

Student loans: $700/month, or $8,400 annually

Credit card debt: $400/month, or $4,800 annually

Car payment: $500/month, or $6,000 annually

Total: $19,200.  

Now let’s recalculate our flexible spending:

Annual fixed expenses: 

$86,900 + $19,200 = $106,100

Annual net income – annual fixed expenses: 

$100,000 – $106,100 = -$6,100

Oops.  This spending plan shows that they are in minus territory, which means that they are spending more than they are making.  See what a pain it is to have debt?  You could have used that $19,200 for pretty much anything else- a nice vacation, front row concert tickets, private lessons for your kids, or the newest gadget.  Instead, you had to use it to pay back money you borrowed.  Bummer.

Regardless, you now have an idea of where your money is going.  This is a huge step, so be proud of your accomplishment.  You have your numbers, and the next step is to plan how you’re going to rearrange these numbers so that they work in your favor.

A: In scenario 1, Dr. Jones is doing well.  She has money leftover each month to spend as she pleases, and she just has to make sure she stays within a certain flexible spending number.  

In scenario 2, Dr. Jones is not in a good place.  She is consistently spending more than what she makes.  This does not bode well for the future, unless she wins the lottery or gets a sizable inheritance.  No one should ever rely on these methods to take care of their financial problems.

“P” IS FOR PLAN

If you are finding that the number you calculated for the flexible spending amount is too little, or even in the negative, don’t lose hope.  The purpose of this was so that you can make a plan to address this predicament.  You will unfortunately have to go through your spending plan, line by line, and see where you need to make cuts and/or find ways you can increase income.  It really does boil down to just math.  For some, maybe this will encourage you to ask for that long overdue raise.  Or maybe you will need to consider a side hustle to earn you extra income.  If you cannot increase your income, then the only other option is to decrease your spending.  Downsizing your home may be very difficult, but perhaps you can re-think your utility bills and aim to be more energy efficient.  Maybe you need to eat more home cooked meals and cut down on the number of times you eat out.  Perhaps you need to think about a camping trip versus a cruise.  There will be difficult decisions to make, but remember that you are now armed with valuable information and you have the power to change your financial trajectory.

Every spending plan will be individual.  There will be some categories that will be fixed for some people and flexible for others. Many people will have to figure out a spending plan based on separate personal accounts versus a joint account.  But as long as you have the numbers for income, fixed expenses (monthly and irregular), and flexible spending, you will be well on your way to a spending plan that works for you. 

P: For Dr. Jones in scenario 1, she found out that she actually didn’t spend everything that was earmarked for flexible spending.  At the end of the year, she took this money and decided to put it towards an extra payment on her student loans.

For Dr. Jones in scenario 2, she decided to do some extra emergency shifts.  In addition, they planned to have a nice staycation versus a more expensive trip and eat out twice a week instead of four times a week.  Her goal is to pay down her credit card debt as soon as possible.

This was essentially how I developed my own spending plan.  I realize that this may not work for everyone, but hopefully this will encourage you to make a spending plan for yourself.  It is quite the eye-opening experience.

Have you made your own spending plan?  How is it working out?  Care to share any tricks or tips that worked for you?  Comment below!

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