Most Americans have a hard time understanding where their money goes every month. It is important to create a method that is proactive, easy to monitor, and oriented towards your goals and values. With this simple approach you can slowly build a upon success each month.
- Start by creating a cash flow plan that aligns with your values and goals.
Schedule some time to reflect on your values and goals and determine your money is being allocated to these goals. Involve your partner, spouse and/or older children.
Assess how satisfied you are with your current life goals and dreams. Are you happy with your relationships, career, social life, travel, health? Which areas would you like to improve? Our time, money and energy should be redistributed based on our level of satisfaction with these areas. This is an important step as it allows you to set priorities that will provide a framework for your plan going forward. This will minimize conflict and disagreements about money.
People find that when they simplify their lives and spend less money on things they find better peace of mind.
- Next, you should review your spending habits from the past to establish where you are currently allocating your money.
Often people are surprised to find that they are overspending in areas that are not extremely important and would benefit from cutting back in those areas to increase their savings or expenditures elsewhere. If you are spending too much on eating out and you are committed to losing weight you may want to eat more healthy meals at home. If you are spending too much on gifts to family members or charity but don’t have emergency cash reserves that would help you in the event of a catastrophe, then an adjustment may be necessary. If you are spending too much on your children to the detriment of your retirement savings (and their college fund) then you need to reconsider your spending in that area.
- Now that you have a cash flow plan that is realistic and aligns with your values, set achievable monthly cash flow targets for your discretionary (flexible expenses) and savings.
Setting up realistic initial targets are important because if we are able to reach our targets then we are motivated to continue monitoring our cash flow.
The best way to structure your system is to utilize three primary buckets or sources of expenditures.
|(Obligations)||You Control||Goals and Dreams|
|Mortgage, Utilities||Eating Out, Travel|| |
- You should calculate the amount of basic living expenses that are fixed each month and automatically deposit that amount into your checking account from your paycheck.
- Now set a target amount based on your income and spending goals from above and sweep that monthly amount into a debit account.
It is strongly recommended that you have one for each spouse as well as older children. For the first few months you will have to figure out what is most reasonable—not too harsh or restrictive and not too large so that you are not meeting your savings goals. If you have this specific amount in a debit account you will not overspend like you would with a credit card.
- Finally, sweep target savings amounts into separate savings accounts that are designated for your specific goals. You may have an emergency reserve account, auto reserve, retirement accounts, as well as vacation account.
By sweeping your amounts into these specific buckets it will force you to conform to the budget that you created that was based on your important life goals.
After a few months of this process you will find that saving is now on autopilot and you are finally starting to see a positive increase in your savings as well as improved peace of mind.
Good luck with it hope you make great progress this year!