Once you know how much you’re spending each month, and on what (see Managing Your Cash Flow — Step 1), the next step is to create a plan to make sure your money is doing what you want it to do. Some people might call this a budget, but if that sounds boring and/or difficult, call it your spending plan.
There are lots of ways to create a spending plan, but I like to do what I call the draw-down budget. Allocate your money to the most important things first, the ones you have to pay: rent/mortgage, utilities, phone bills, etc.; and those you want to commit money to: emergency savings, retirement savings, holiday savings, and so on.
You may want to set aside an amount of money for groceries and put it in the “have to pay” section; any money you spend beyond that is for treats or extras.
Once you’ve figured out how much money you HAVE to pay out each month, the rest goes to your variable spending. You’ll need to track it digitally or with pen/paper or use the cash method, but once your variable amount is used up, that’s it — no more spending for the rest of the month.
There are several advantages to the draw-down budget:
- It’s easy to use.
- All your bills get paid.
- You commit money to savings.
- You don’t spend more than you make.
I use a draw-down budget myself and have developed several categories of spending. If you use spreadsheets or would like to learn how, and how to use one to create a budget, contact me. I’ll be happy to share mine with you.