- Create a new budget for the new year by reviewing last year’s actual expenses vs. budget. In my opinion, living below your means is rule #1 in personal financial planning. Regardless how much you make, if you do not save enough for your future, it would be difficult to achieve financial independence down the road. If you use expense tracking tools such as Quicken, www.mint.com or your own Excel worksheet, now it is the time to generate your cash flow statement by category to see how well you did in year 2017 by comparing actual spending to the budget.
You should pay attention to the categories that are discretionary such as shopping, dining out, vacationing, entertainment and home improvement as they are the ones you have most control over. If you are overspending right now, consider this tip “Cutting Out The Fat”. Direct your money to the things and experiences that give you the highest Emotional Return on Investment (EROI), because these purchases bring you happiness weeks and months after the purchase. Go through your expenses for the last 1 to 3 months, and rate them from 1 to 5 (one being low EROI and five being high EROI). Cut out the expenses with 1 and 2 ratings and keep the ones with 4 and 5 ratings. Do this exercise now and revise your monthly budget.
Another way to help you plan your cash flow is setting your discretionary spending at 20% (or your own percentage based on your monthly budget) of your take home pay. For example, if your take home pay per month is $5,000, then your discretionary spending is $1,000. Your weekly discretionary spending budget figure is $250. This can be set up to come from a separate checking account that you monitor closely, or you can just start using cash as an exercise toward getting into the habit of spending on the things that really matter. If you find that cash is tight after four to five days, you probably will tell yourself to hold off on buying that pair of dress shoes until next week, when you have extra cash in your purse.