Before you can have a spending plan, there are a number of steps to take. But today, I want to briefly describe the various components of a solid spending plan. DA is a program about clarity. We need to be willing to live in reality and that means that our money is finite.
We can no longer afford to just spend arbitrarily and hope for the best. For me, it is not enough simply not to debt. If I don’t have a detailed spending plan, I can easily fool myself into thinking I can afford one item, totally forgetting about a fixed expense (for example, car insurance) that is coming up.
You need to know where your money goes. Some people create categories down to the smallest detail and others have broader categories. For instance, I have a category for groceries, restaurants, and house supplies (like paper towels). A DA friend of mine simply has a category called “Supplies” that encompasses all those items.
One concept to keep in mind is that in DA, we do not work for our creditors and we do not live in deprivation (which is not an excuse to go out and splurge!). We and ensure that as soon as possible, we put money into categories for our pleasure (hobbies, vacations, clothing, etc.). And we pay ourselves before our creditors.
Here is a sample of a few of my master and sub-categories (I use a program called YNAB for my spending plan.)
2) Accumulating in categories
This is a crucial concept and one that many DA’er’s seem to struggle with making work in their spending plans.
[I have found that accumulating in categories is essential to my program and something I have found to be consistently lacking in many people’s spending plans. This is because they say they don’t know how to accomplish this aspect of the spending plan within their method of tracking money. I will show you in later posts how to do this easily in both Excel and a program I use called YNAB.]
Now, some categories are meant to be used up each month. For instance, mortgage or other fixed monthly expenses. Or your grocery category.
But some categories need to be accumulated over time for payment (such as an annual property tax bill) and you will want to divide that total by the number of months you need to save for it and put that money into the category each month so it can accumulate and be available when you need to pay it.
And some categories may be accumulated and used at will.
For example, I put $65/month into clothing. But I haven’t needed any clothing for a few months. The way I track my money, if I don’t spend it one month, that category accumulates. I didn’t need any clothes for a few months, so now, I’ve accumulated enough for new running shoes!
Here is a screenshot:
Here are types of categories where you may accumulate funds:
a) Discretionary categories
Examples of discretionary categories are clothing, entertainment, vacation. You can determine how much goes into that category each month to build up a reserve over time or to use as needed. That doesn’t mean we hoard our money. It is there to be used, unless it is for something special, like a planned vacation.
b) Fixed categories that are paid annually or every three months, etc.
Examples of such categories might be car insurance that is paid every six month or property taxes paid once a year. So, for the car insurance, you take the total and divide by 6 and that is how much you put into the category each month. For the property taxes, divide by 12. I do this for all kinds of items, such as my annual antivirus license. No amount is too small to use this method.
Here is a screenshot showing how I did this with my car registration:
Notice that I designate $4.86 each month in that category and have now accumulated $38.88. So when it is due, I will have the full amount ready for payment!
c) Items you are saving up to purchase
You may want a bicycle or washing machine or big screen TV but don’t have enough money right now. You can add a category for this item and assign a certain dollar amount each month to accrue until you have enough to purchase it. I just spoke to a DA person who was so excited that finally, after two years of accruing funds, she just bought a top-of-the-line blender!
d) Amounts left over in fixed categories.
For instance, your electric bill was lower one month or you didn’t use all your grocery money one month. It is probably best to leave the money accumulated in that category until you know over time that you won’t need it. So until you are sure you have enough grocery money each month, just leave it there and use it if needed for groceries.
I don’t know about you, but I am the type of spender where money burns a hole in my pocket, so learning how to sit with money is a very new skill!
Here is a screenshot of some examples:
Notice that the amount I spent this month on CATV (cable bill) is greater than the amount I planned. That is because we changed service providers. I spent $100, but only planned $95.65. But note that the Balance is 0! That is because I spent less last month and had money left over. So, too, you can see that the FPL (electric) has $3.12 left over and the water bill has $10 left over. I am not going to spend that money because those bills may go up and down depending on the month. The amount I planned was the average over 12 months. And that may be a good suggestion to start for utilities that are fixed, but may change slightly.
3) Planned spending
What works for me is the philosophy that “Every Dollar Has a Job” (for more information, see YNAB’s video explanation). So I allocate all income to my categories. That means if I earn $1,000, I fill in my categories with $1,000 total.
This is one place where the rubber meets the road when you first start working DA. You may find that there isn’t enough money for all your categories. But a closer look may show you that if you make choices, you will have enough. But it may mean delaying gratification for what you want, or possibly choosing to spend less money on one or another discretionary activity. So you may choose to buy one fewer pair of shoes or eat out less often if necessary.
Money is finite. There is an infinite source, but the amount you have at any one moment is finite. You can wish and vision and pray all you want, but to my knowledge no one has ever made $1 equal $2.
The key here is NOT to try to do this on your own. That is the purpose of the Pressure Relief Group (PRG), where two other DA members spend time with you (either in person or on the phone) to help you figure all this out.
I have felt hopeless many times since joining DA about how I will make my spending plan work. But with the help of my PRG, sponsor, and network, it always has. Of course, you may sometime face a crisis situation. But I have seen over and over again, with myself and others, that it passes and works out if we are willing to sit through the pain and not give in to the disease of debting and compulsive spending.
So that is a very basic overview of the spending plan. I will be covering these topics in much more detail in the future. For more information, see the DA pamphlets, “The Numbers: One Approach” and the Spending Plan pamphlet.