How to plan your spending

As you wander through the world, sooner or later you will come to two great realizations:

1) There's a lot of really amazing STUFF for sale out there.
2) No matter how much money you make, it won't be enough to buy everything you want.*

This is why you need a spending plan. Here's how it works: you figure out how much money you're making, then plan out how to spend it -- to get both the things you need and the things you want. If you can get used to doing this now, you'll be on track to make your life a whole lot smoother.

You will need:

1. A pencil and piece of paper, and/or a computer.
2. Your latest paycheck stubs, or a record of money you took home in the last 6 months.
3. Stubs from your most recent bills (rent, utilities, and other stuff that has monthly payments).
4. Some spending goals (things you want to buy or do with your money).
5. A calculator, especially if you're a mental math midget like me.
6. A half hour or so to write your plan, and another half hour every few months to tweak it.

Figure out how much money you take home every month. If you have a job with a regular paycheck, this is pretty simple -- for example, if you get $150 a week, multiply that number by 4 weeks in the average month to get your take-home pay (everybody get $600? Right. Just checking). If you don't have a regular job, this step's a little harder -- add up all the money you've taken home over the last six months, and find the average. (Example: total of $3,500 take-home pay over 6 months = 3500 divided by 6 = about $583.33 per month.)

Don't make the common mistake of adding up how much money you make before taxes -- figure out how much you actually have available to take home and spend. If you can't spend it, don't count it. (You might have less take-home pay than you think.)

Once you have a guesstimate of your monthly take-home pay, write it at the top of the paper. This number is the kitty: the total pot of money you get to distribute. Underneath that, make two lists. The first one, the Gotta List, covers living expenses you have to pay every month: rent, utilities (lights, heat, water, phone, garbage, Internet), anything you're paying off on time like credit cards or car payments, grocery bills, gas money, etc. The second one, the Wanna List, covers things you want to buy with your money: movies, video games, books, a car, a trip to Disneyland, 10,000 gumballs, etc.

Now, pulling money from the kitty, start writing down how much you pay every month next to each item on the Gotta List. (Time to get out the calculator.) The Gotta expenses get first dibs from the kitty, for two big reasons. First, adults honor their commitments, including the terms of the contracts they sign, and most of these expenses involve contractual obligations that you agreed to honor, such as when you signed your rental agreement. Second, if you don't take care of these things first, you'll lose control of all your money and your life. If you're a honorless dirtbag who doesn't keep your word, angry landlords and frustrated power companies can turn off your utilities or kick you out of your home; if they don't get paid after that, they can go to court and garnish your wages to make sure they get what you owe them, or do things like repossess your car. (Good luck getting a loan now, dirtbag.) They won't do any of these things if you do your part by honoring your commitments, so pay your bills first!

Some items on your Gotta List are fixed expenses, meaning the cost doesn't change much from month to month (rent, for instance). Others are variable expenses, which go higher or lower depending on how much you use them (if you're like most people, your heating bill will be higher in winter than it is in summer). Still other expenses will only come due once every three to six months; for these, split the cost into equal monthly chunks and write it down. If you're not sure how much you spend on these items, make your best guess. This first spending plan is just a rough draft, so it doesn't have to be perfect. At the bottom, total up everything from the Gotta List. Then add $10 for fudge factor. (Just trust me.)

You may discover some useful information as you work on your plan. For instance, if you take home $600 a month and your rent alone is $500, um... to put it mildly, you've got a cash flow problem. Or you may find that everything in the kitty is going to the Gotta List and there's nothing left over for the Wanna List. What do you do? Well, you could find a better-paying job to boost the money in the kitty. This is a great strategy and worth pursuing, but it's not always possible in a bad economy. Also, look at Great Realization #2 again. The other option is to inspect the Gotta List for places where you can legitimately spend less money. Fixed expenses are hard to change -- yes, you could move to a place with lower rent, but you don't want to end up in a total rathole fleabag, and it also costs money to move (ever hear the phrase "first, last and deposit"? You will). But you can fiddle with variable expenses by changing how much you use them. There are lots of ways to squeeze a little more money back into the kitty.

OK, assuming you've covered everything on the Gotta List with money left to spare, take some time to do the Extra Moolah Dance of Triumph. Go on, I'll wait.

(20 minutes later)
All finished? Time to turn to the Wanna List. This list is wide open, and it's all yours. You can put any spending goal you want on it, from a pair of $500 shoes to a trip to Damascus to feeding all the poor kids in Bhutan to going skydiving with your cat. The point of this list is: if you love it and want to spend your money on it, go for it. There's no such thing as a wrong entry on your Wanna List (well, unless one of the entries is "be a creepy stalker" or something) and there's no set method for spending your extra money. You can buy the small stuff first, or start putting money away for a big-ticket purchase, or do a little of both -- whatever you choose.

What's the point of this exercise? It's to help you understand where your money goes, and to help you calibrate where you want it to go. Money is a representation of your life energy, which is limited, so you might as well put it in the places that are most important to you. In other words, save as much as possible on things that don't matter to you, so you can free up money to spend more on things that do matter to you.

Most non-adults don't have a spending plan. They don't think of money as their life energy; they just drop it randomly on anything that catches their eye, until they run out of cash. Then they beg their family and friends (and the credit card companies) for more. Worse, a lot of them don't even earmark money for the Gotta List first, which means they tend to end up in huge debt and/or getting kicked out on the street. If you have a spending plan, you get to consciously decide where your money goes. In the process you'll learn what's really important to you, and discover what kinds of purchases waste your money.

OK, keep this paper (tape it to the wall or something), because now you're going to put your first-draft spending plan into action. See that amount you put at the bottom of the Gotta List? Take it out of circulation. Remove it from your spending money right now -- either by temporarily moving it to your savings, pulling it out in cash, writing out payment checks ahead of time, or somehow making sure it's off limits so you can't spend it by accident. Use this money only to cover the cost of the items on your Gotta List.

Also keep your receipts, because this month you're going to keep track of where the rest of your money actually goes. You can choose to do this several different ways. I've used Quicken for almost 2 decades, but any money tracking program will work as long as you'll use it consistently. There are online money services like Mint (the money program with super-fresh breath!), or just do battle with a pencil and paper if you like that sort of thing. I prefer money programs because they make the math easy, and they'll also make automatic graphs of your spending and can show you how close you are to your goals. Nice! Plus if you have a money program with a mobile app, you can enter amounts into your phone right as you spend them.

At the end of the month, take another half hour to look over your draft plan and your actual money tracking. Were the numbers on your Gotta List fairly close to what you actually spent, or were they way off base? Make corrections to your plan as necessary, so the amounts you paid for items on the Gotta List are closer to what actually happened during the month. You will probably have more or less money left over than what you originally planned. If you have less, don't sweat it; you can expect to make another draft or two of your spending plan before you iron out all the kinks. If you have more, congratulations; put the extra money toward stuff on the Wanna List!

Oh yeah, one other thing: the process I've just described is usually called basic budgeting. But most people's brains implode when they hear the word "budget." They think it's too hard, or that budgeting means never doing anything fun. Pfft. A budget is just a way to plan out how you're going to spend your money. So go out and spend it AWESOMELY.

*Unless you're someone like Bill Gates. Good luck with that.