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The Spending Plan with Built-In Rewards

The Spending Plan with Built-In Rewards

January 28, 2023

When it comes to personal finances, one way to increase your savings in the long run is to spend less than you earn, or if that is too difficult, increase your income to exceed your expenses—easier said than done. In fact, it may seem that there is never enough to pay the bills and still provide for all that you and your family members want or need.

If you find yourself in this situation, there is a way to manage your financial predicament. You can monitor where your money actually goes and plan ways to spend it more wisely, or in other words, prepare and adhere to a budget.

However, if the mere thought of a budget makes you feel deprived, call it a personal spending plan instead. Rather than focusing on what you should not spend, a personal spending plan can help you wisely redirect the money you do spend.

The reward comes in paying yourself first by labeling the budget’s top line as “savings.” Even if you start with zero dollars on this line, with patience and persistence, you may be able to find ways to reallocate your money over time and see your savings grow.

Here are some steps to help you get started:

Track your expenses for one month. Record your daily expenses in a small notebook or enter details on an e-calendar for at least one month. Categorize your expenses as fixed, variable, or discretionary. Fixed expenses include those for which the cost remains the same every month, such as your mortgage or rent, car payment, and insurance premiums. Variable expenses are those you pay on a regular basis, but with varying amounts, such as food, utilities, child care, travel expenses, and credit card purchases or debt. Discretionary expenses are those you could forgo if necessary, such as dining out, frivolous shopping, and entertainment. After tracking your expenses for one month, you can begin to see exactly where your cash is going.

Calculate each expense as a percentage of your income. This exercise helps identify how each expense relates to your total income. For example, if you lease a new sport utility vehicle for $320 per month and your monthly income is $3,200, you are spending 10% of your income on your vehicle. Aim to trim these percentages wherever possible. It may be possible to make large gains in savings by reducing many expenses by small percentages.

Prioritize your expenses. Rank each expense as “important,” “moderately important,” or “unimportant.” Carefully scrutinize each item, starting with the “unimportant” ones. Eliminate those items you can do without. You will probably find the most wiggle room with discretionary expenses. The savings you generate may be enough to begin a modest savings program. Then, look for opportunities to trim expenses that fall into the “moderately important” and “important” categories. For example, you may be able to find a less expensive cable TV/Internet/phone bundling plan if you shop around. Or, perhaps you could manage with a less expensive vehicle when your auto lease is up.

Pay yourself first. After successfully crafting a budget and identifying savings where you can, write yourself a check for the amount you saved and pay yourself first. How you manage your money depends on how much you have and your future goals. So if you plan on sending a child to college, you might develop an education funding plan. You could also consider contributing on a regular basis to an Individual Retirement Account (IRA) or employer-sponsored 401(k) plan planning for retirement income.

By treating your savings as a weekly or monthly expense, you may be a lot more likely to set aside money for your future. As you watch your funds accumulate, you may find that putting yourself first has become its own reward.


Important Disclosures

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This article was prepared by Liberty Publishing, Inc.

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