Back to Basics: Implementing A Spending Plan
Navigating the complexity of high interest rates, growing debt, and elevated costs can be daunting, but implementing simple financial practices can empower individuals to improve their financial and credit confidence. Most consumers have access to a variety of different software or online budgeting tools and resources, yet many don’t know where their money goes every month. This can be especially frustrating for those looking to pay off debt or get qualified for a home loan. Learning how to build and use a simple spending plan can help identify budget deficiencies or surpluses, and give insight into how to use income towards reaching specific goals.
What is a spending plan (or budget)?
According to a newsletter released by the AFCPE, a budget or spending plan is “being conscious of how we spend”. With credit card debt at an all-time high ($1.03 trillion as of Q2 2023) and the growing burden of high auto loan payments and interest rates, learning how to build and use a spending plan can give a boost to of confidence.
Building a spending plan.
You can find example budgets and spending plans online (here is a recommended option from the CFPB). The process consists of listing all regular monthly expenses in one column. Some professionals recommend only adding the minimum payments on credit cards to the expense list, which may be preferred for individuals looking to build a debt payoff plan.
At the bottom of that column, add the total amount of monthly expenses. Now, add total income in a separate column for the household. Once you have total income and total expenses, subtract expenses from income.
If there are more expenses than income, that is what we call a cash flow deficiency. If there is more income than expenses, that is called a cash flow surplus. This is a great starting point for individuals and families looking to build a plan to improve their overall financial health. If there is a cash flow deficiency, it may be time to either cut unnecessary expenses, or look for ways to add additional income.
For those with a budget surplus, those funds can be used to help optimize credit scores or save for a down payment. For those carrying high credit card balances or worried about their debt-to-income ratio, they can implement debt payoff strategies with the cash flow surplus found in their spending plan. Click here for debt payoff strategy recommendations.
Tips and recommendations.
Many people get caught hyper focusing on small expenses (i.e., Avocodo Toast) and tracking details that derail efforts in building healthy financial habits. To alleviate this problem, start with a simple spending plan and add to it over time. There are a lot of creative options out there, from budgeting date nights to reward driven budget tasks, but remember the goal is to build the habit of conscious spending, ultimately putting money to work to help build and sustain a healthy financial future.
1. Start with a simple spending plan, and add to it over time.
2. Create micro-incentives to celebrate when the plan is executed.
3. Monitor progress via credit monitoring or bank account monitoring for debt payoff.
In times when things are complicated, it’s nice to have simple solutions to help take positive action towards healthy finances.
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