Congratulations on completing Day 3 – you are now more than half way through! In Day 4 we will create a balanced spending plan, review the success cycle and learn how to use the envelope budgeting method in today’s high-tech and often cashless world.
The following checklist will assist you in keeping today’s tasks straight:
- Learn the four steps of the Success Cycle
- Create a balanced Monthly Spending Plan
- Read Using the envelope budgeting method in today’s cashless society
Learn the Four Steps of the Success Cycle.
In order to make changes, you need to have a system that you can really use. The Success Cycle is a system that many businesses use – it is ideal for individuals as well. The Success Cycle will help you stick with your plan to spend less than you make. There are four basic steps to this system:
FIGURE Success Cycle
The Success Cycle seems relatively simple, but results can be extraordinary when these steps are followed consistently. All four of the steps must be followed for this system to be work effectively – the steps cannot be shortened or eliminated. In our society we often like a quick fix, however, we need to keep in mind that financial fitness and stability will come through the steady and persistent application of these proven principles.
Let’s review each of the four steps in detail to ensure that you understand them clearly.
Step 1: Create a plan
Just like you wouldn’t consider taking a trip without a plan and a road map, you don’t want to navigate your financial world without a plan. You created your Net-Worth Statement – the next step will be to determine what direction you want to take next. An important element of this will be how you plan to spend your money on a day-to-day basis so that you can get closer to your financial goals—that’s where creating your balanced spending plan comes in. We will do that a little later in today’s lesson.
Step 2: Track every transaction
Once your balanced monthly spending plan is completed, it will be critical that you track all of your transactions so that you can assess your progress. The only way to get complete value from tracking is to track every transaction – that includes expenses and deposits in all your budget categories, but also in all of your accounts. Tracking every transaction can seem overwhelming at first, but with the right tools, this can be very simple. There are many different tools you can use to do this effectively—You can use paper, an electronic spreadsheet, software, or an online application such as Mvelopes® Personal, or even a combination of all of these.
Step 3: Compare your actual performance with your plan
Unless you take the time to compare your plan with your actual results, having a written plan will do you very little good. This comparison step is a crucial one – it includes looking at both your income and your expenses. As you make this comparison, you will immediately understand how and where to make necessary adjustments. You should compare your results on at least a monthly basis.
Step 4: Make adjustments
Creating a perfect plan the first time around would be nearly impossible. Planning is a process that takes time, information and experience. As you plan, track and compare, you will gain the information and experience needed to adjust your spending plan accordingly.
You may want to increase spending in certain areas, and decrease the allocation for another. The plan should be tailored to your own personal needs, and that of your family, if applicable. That is the only way you will find success.
Create a Balanced Monthly Spending Plan
In Day 3 you created your list of spending accounts, or categories, for your spending plan. The next step we will want to take is to assign a spending amount to each of these categories.
Define the amount of monthly spending for each envelope spending account. Starting with the list of envelope spending accounts, determine the amount that you have previously spent in each category. To do this, it may help to look at past statements and/or receipts.
Sometimes it’s easier to determine the amount you spend annually. If that’s the case, simply divide the annual amount by 12 to determine the monthly amount. This is especially true for your periodic spending expenses. Calculate how much you will spend on vacation, car registration, annual insurance premiums, holiday gifts, etc. Divide those amounts by 12 to determine how much you need to set aside each month to cover these periodic expenses.
Using the Monthly Spending Plan Worksheet record your annual and monthly spending for each of your envelope spending accounts. You will likely need to make adjustments, so please be sure to use a pencil to record this information. Use the example below as a guide if needed.
When you have entered a monthly and annual spending amount for each spending category, calculate the totals for monthly required, monthly discretionary, periodic required, and periodic discretionary accounts. Next calculate the total annual spending and total monthly spending by adding up those sub-totals.
Don’t worry if at this point your spending appears to exceed your net income. On average people spend 10% more than they bring home, often without realizing it – just as the case may be with you. In the next step we will work to balance your spending plan so that this overspending does not continue to occur.
This spending plan is a working document. Once you start tracking your expenses from day-to-day, you will be able to review your spending plan and make adjustments as needed.
Balance your monthly spending planNow that you have calculated your total monthly spending, lets compare it against your total monthly net income so that we can determine if you are over or under spending. As I mentioned, people spend on average 10% more than they bring home, so don’t be surprised if you are amongst those that are doing just that.
A balanced monthly spending plan means your monthly spending requirements equal your total monthly net income. First thing, determine the amount, if any, that you have left after you have satisfied all of your monthly spending requirements. You would calculate this number by subtracting your total monthly spending (the amount you just calculated in the section above) from your total monthly net income (the amount you calculated in the lesson on Day 3). This is easy to do right on your Monthly Spending Plan Worksheet – simply record your monthly net income in the space provided and subtract the total monthly spending from your total monthly net income.
As stated before, don’t be shocked when you see this number for the first time. Most people in our society are over spending their income each month. If you are one of the fortunate few who are spending within your monthly net income, you have a few choices:
- Allocate the remaining balance to one of your envelope spending accounts, such as savings
- Increase the amount you are allocating for debt repayment or investments
It is important that you allocate all remaining income to an envelope spending account or accounts. Income that is not allocated may be spent in ways that are haphazard and unplanned. Or even in ways that are contrary to your financial goals.
For the rest of us, who are overspending, we need to find ways to reduce the amount of our monthly expenses, so that the total monthly spending is equal to our total monthly net income. The first envelope spending accounts that you will want to review for reductions are your discretionary accounts – both monthly and periodic. Review the list you have created and look for areas where you believe you can make reductions in your initial spending amounts. Keep track of the adjustments that you are making and subtract these adjustments from the total amount of overspending.
Remember, the goal is to live within your means. If you spend less than you make consistently, you will be able to build wealth, rather than debt.
If you really want to make a change in your financial life, you may need to make some sacrifices. No discretionary envelope spending account should be spared – cut expenses wherever possible to get your spending down below your income. If you are married, make these decisions with your partner – this will ensure greater success. When you are involved in the budgeting process together, you can count on successfully reaching your financial goals.
If you still need to make reductions after you have reviewed your discretionary accounts, it’s now time to look at your required expenses. Adjustments to these accounts are more difficult, as they usually require more significant changes. Carefully review each spending account to determine which can be adjusted. Sometimes you can negotiate reductions in your insurance expenses, reduce your cable or cell phone plan, or even refinance existing debt to facilitate a lower interest rate; therefore, reducing your monthly payment.
Once you have balanced your spending plan, you will likely feel a sense of relief, knowing that you can live within your means. If you can master the principle of spending less than you make, you will very soon start to see the positive results. As you continue to reduce your debt and increase savings, you will be able to reach a financial fitness level that few others enjoy.
Using the Envelope Budgeting Method in Today’s Cashless SocietyTraditionally the envelope budgeting method used cash and actual paper envelopes; however, in today’s high-tech and often cashless society, that would be a little unrealistic. Some expenses simply cannot be paid in cash and, therefore, we need to find ways to use these tried and true principles of envelope budgeting, in today’s world.
The major problem with many budgeting systems has been that they provide after-the-fact information, meaning you create a plan in advance and determine the amount you will spend in each spending category. At the end of the month, you then run a report, which tells you all the categories in which you have overspent. With this approach, the information is not real time—in other words, you did not have the information you needed at the time you were making a purchase decision. Systems like this do not tell you how much is left to spend. An envelope budgeting system provides this critical information. Read the entire article on Envelope Budgeting…
Congratulations on completing Day 4 – you are almost done! In Day 5 we will learn how to use credit cards effectively without increasing debt using an envelope system, we will create a debt elimination plan to rapidly decrease your debt load, and we will read some articles on how to save some extra money.
See you tomorrow!