6 steps to building your first spending plan and stick to it

Ok, we all heard that reaching your financial goals starts with knowing where your money goes and even better telling them where to go! 

For the last few years I’ve been sitting with clients, looking into their accounts and building a plan for their finances, so that their money behave. 

Just as you need a business plan to grow your business, or a food plan, if you want to improve your diet, or a plan for your day to improve your productivity, building a plan for your finances as essential to your wealth building. 

So don’t skip any of the steps if building wealth, or even better, creating order in your finances is your goal, and you want to know where your money goes. 

Without further ado, let’s dive into the steps:

Step 1.

Put at the top of your spreadsheet or on a piece of paper all the types of income you expect to have in your bank account in the upcoming month. This can be your salary if you are employed, your dividends or salary if you own your business, any royalties, side gigs and gifts that you foresee. This will not be exactly what you will have, especially when it comes to gifts and gigs, but you want to have as close as possible of a prediction.  

If your income is inconsistent, budget based on your lower months. Make sure you cover in step 2 and 3 your basic needs. If your salary is higher than you predicted you can then direct the disposable income to your wants or towards paying off your debts/saving for your next goal.

Step 2.

Go through your accounts and look at your Direct debit expenses. These are your fixed costs. Put them down on a spreadsheet or on a piece of paper (this spreadsheet is a great starting point, it is the one I use in my personal life and the one I start with when the client doesn’t have any other starting point). These costs will typically be your mortgage repayment or rent, your energy bill, water, phone, council tax, etc.

Think of any other fix costs that you pay and that are not currently on a Direct Debit. We don’t put here your gym which is a nice to have, but we do put your car insurance or life insurance/health insurance if this is a must for you.

Step 3.

Look at your regular outgoings when it comes to groceries, restaurant outings, your trips to your favourite coffee shop and those little bits and bobs and snacking you buy from time to time when the low 4pm blood sugar hits. Put them all in the spreadsheet or your piece of paper by looking at averages or by doing a guesstimate. You will now have a total for what we call your semi-fixed costs. These costs are there every month but they can vary. These costs are also the ones you could easily cut down with a bit of discipline (like following your food plan and getting your snack supplies with your main weekly grocery shop as compared to nipping to the shop!). If you are paying off debt, your restaurant category should be to zero for at least a few months to help you move faster progress on your journey.

Next, tackle your transportation to and from work,

Step 4.

Now, this is a step that you might want to skip in case you don’t have debts. But if you do have, look at your outgoings for the month when it comes to your debts. This can also be your lease payment and that payment for the fridge you bought a couple of years ago and you still pay at £20/month. If you have student loan this is where your payment will go.

You will find debt in the category at the bottom of your spreadsheet. If you work on a debt repayment plan, I’d highly recommend the debt snowball method, just because it tackles the smallest to the largest debt and it helps to give you a boost in confidence by tackling the smallest debt to the largest. Make sure all your payments are minimum and, if you have any extras, you put towards your smallest debt. 

Step 5.

Next, we will look at your entertainment and any other things that are extras/wants, like that gym membership that you keep forgetting to use :). By going through your bank account, you will also find payments that you don’t recognise or forgot you set up (like that chair yoga subscription that you promised yourself you will do with your New Year’s resolution, but that you totally forgot about). Apple subscriptions are another item that you want to review. In your phone, go to Settings, click on your photo and then to Media and Purchases, to see what you are paying Apple for.

On average, my clients find another £300 to £400 that they can then distribute towards their financial goals or their debt. You’ll feel like you had a pay raise once you go through this review.

Step 6.

Once we covered your fixed and semi-fixed costs and your minimum for your debt repayment, we want to think about your next financial goal especially. Be it paying off your debt or saving for your prudent reserve (3 to 6 months of costs saved aside in case of rainy days), or paying off your mortgage, whatever is left form your income, we will put towards this particular goal. Check again what is left from your monthly income once you paid your costs and decide where to direct it based on your next goal. If you don’t have enough disposable income to make a difference on your next financial goal, you might want to go back to your entertainment and cancel some things that you don’t really need. This is up to you. Make sure you have zero once you take all your costs and your savings/extra payments towards your debt from your income. 

And just like that, you now have a zero based budget. You told your money where to go and for the first time you have a plan. Make sure you check in with your plan on a regular basis and that you track your expenses. If you go off track don’t panic but adjust. Review next month.