Questions about financial decisions come up all the time.
Some decisions don’t involve a lot of money but over time can make a big difference. For example, Melissa frequently purchases items just because they are on sale. At the time of purchase they seem like great deals, but afterwards she realizes she either has more of the products than she needs or she may not want them at all. Were these really bargains or just impulse purchases?
Some decisions do involve a significant sum of money. Tim and Sally are a couple who happen to be renting a condo that just came on the market. They love the view of the mountains, the location, the size and it would be so convenient for them not to have to move. It seems like they can handle a mortgage payment which is larger than the current rental payment. But will paying more each month conflict with other priorities in their life even though the condo seems perfect?
Another financial decision is whether to save money or pay off debt. Jennifer and Gary want to pay off their credit card debt. They feel it would be reasonable to pay aggressively on their credit card debt because the interest they are paying on debt is significantly higher than the interest they can earn on savings. Will making aggressive payments to reduce credit card debt and not saving money at the same time be their best strategy for paying off their credit card debt?
Is having a spending plan always the answer? Yes! Looking at the numbers will give you clarity. A spending plan will let you look at the consequences of your financial decisions before the money is spent or the commitment is made. A spending plan is more flexible than a budget. A budget seems rigid and not to be violated. A spending plan is power! It allows for adjustments and keeps you on track for achieving your short-term and long-term financial goals. A spending plan helps you meet your needs and financial responsibilities while enjoying things you have identified as priorities in your life.
A spending plan needs to be detailed enough to show all expense categories. Melissa was always running out of money each month. She could not resist a good bargain. When she starting to plan and track her spending, she became more conscious of how she’d buy things she did not need. When Melissa was tempted to buy because of a sale it started to get easier to limit her purchases to the items in her spending plan, and to reduce her impulse purchases.
A spending plan can save you from making decisions that can be destructive in the long run. Tim and Sally really wanted to buy the condo. They could come up with the sizable mortgage payment each month. Even though paying a mortgage provided a tax write off, on a monthly basis they would be making a major sacrifice of not being able to save for rainy day money and other priorities, not to mention having money to spend on fun. They decided purchasing this particular condo at this time was going to cause stress and keep them from having the flexibility so Sally could continue to work part-time and complete her law degree.
A spending plan is most effective when it becomes a habit and is not just a one time process. Gary and Jennifer could not seem to reduce their credit card debt even though they sometimes paid more than the minimum payment. When they received a small inheritance they decided to use all of it to pay down the balance on their credit card debt. Things went well until it rained and the roof started to leak. They did not have the extra cash to pay for the roof repair so they had to use the credit card again. If Gary and Jennifer had been planning and tracking expenses regularly they could have had a better sense of how to allocate the sudden windfall and continue to reduce their debt.
“Having a spending plan is like planning a vacation, if you don’t plan, you are probably not going to end up where you want to go.”