Money Plan

I don't like budgets; they don't work, or at least don't work right. Instead of budgets I prefer money plans or spending plans. A budget breaks expenditures down by category while a money plan tracks expenditures in order of necessity. For instance a budget will lump lawn care into the housing category and the money plan will put housing at the top of the chart and lawn care in the important but not necessary category or even the somewhat important category. This makes it easier to track and cut spending as your cost of living and life stage change. A Money plan tells you where your money is going not where it can go, this gives you a more realistic view of your financial health.
Take a Look at the sample money plan so it will be easier to understand my explanations and see how a money plan works. After the explanations I'll swing back through and explain some of the items.


First let's take a look at the columns:

• Items - This Column tells you what money is being spent on. These items are the same that appear in a standard budget.
  
• Obligated Consistent Bills - The first type of expenditure is the obligated consistent bill. These bills are the same dollar amount every month and are bond by a contract or obligation. For example you can't stop paying your mortgage without defaulting on your loan and you can't end your cellphone contract without paying an early termination fee.
  
• Obligated Changing Bills - Like the first type of bills these carry an obligation but they don't have a consistent cost associated with them. The three big ones are Water (including sewer), electricity and gas. Unlike a cellphone these don't have contracts but you can't cancel the service or just stop paying for it when you don't want it.
  
• Other Bills - These are voluntary bills that have no contract or obligation, they can be ended or emended easily. There aren't many other bills. Some internet service is obligation free, it can be canceled with a phone call. No contract cellphone plans fall into the other bill category.
  
• Non-Bills - Everything that isn't a bill belongs in this column, these items generally don't have a consistent price and almost never have a contract or obligation.
  
• Extra Expense - Many people have extra expenses when they have the money. These expenses can be frivolous (an extra book) or wise (extra mortgage payments). Frivolous and wise extra expenses can be illuminated just like non-bills but they are frequently attached to bills. Rarely will an item reside only in the extra expense category it is usually accompanied by a bill or a non-bill.
  
• Explanation of Extra Expense - You have to track why you are tossing on extra $50.00 into the grocery category.

Some items can appear in different columns depending on how you handle the expense. If you have a standard 2 year cellphone plan it is an obligated consistent expense; at the end of two years when your contract expires your cellphone expense can move to the other bills category because you can cancel at anytime without paying a fee.
For those of you keeping score at home you realized I skipped the first column; categories. The Categories are the top down framework that holds the items and determines their value.

• Necessary - These category is for items that are 100% necessary. If you were forced to give up these items your life would be negatively affected. This is a fairly static list; you need a place to live so you will have rent or a mortgage, like wise you need to have insurance, electricity and water; you can't escape those expenses. You need to eat so food goes up here so does health insurance and car expenses (most people need a car to make a living). The necessary category is the last category you would cut if you ran into financial trouble.
  
• Very Important - These items aren't 100% necessary but it would be hard to maintain my lifestyle without them. Under extreme circumstances you could cut these expenses.
  
• Important - Things that are good to have but aren't the important. I could go several years before a new shirt become necessary but it's nice to get a new shirt on occasion. A shirt is more than a luxury because you need to be dressed to go to work.
  
• Luxury - Luxuries are items you don't need but you like to have. When hard times hit they are the first to get cut.
  
• Targeted Savings - This category is a type of savings specifically targeted to replacing necessary items. This category is used to track money used to replace major purchases after their life cycle. A $500 dishwasher should last 10 years (120 months) when you buy your first dishwasher start putting an extra $4.17 into a savings account each month so when your dishwasher needs replaced in 10 years you already have the money set aside.
  ING is a great place to go for a high yield, no fee savings account that allows set up sub accounts to easily track targeted savings.
  
• Investments - It's always a good idea to save for retirement, have life insurance and disability insurance. This category is used to track any money that goes into investments.
  

Here is what is nice about the money plan. I can quickly look at it and tell you where you can trim expenses. I don't have to wade through and figure out what portion of my grocery bill I can cut. In this example we can easily and quickly eliminate $430 of monthly spending, that's over $5,000 for the year. The preplanned ability reduces the amount of turmoil when hard times do hit.
The money plan also shows you what your minimum income must be in order to make ends meet. It also encourages saving and wise money habits.