Last Modified on October 13, 2020

Creating a financial plan is often associated with long drawn portfolios, investments, trading, and more. However, while investing in long-term and short-term options, growth of wealth is the fundamental principle of financial planning and developing an effective budget forms its base. Before you go on to venture into more serious aspects such as retirement planning, estate planning, education planning for your children, etc. you need to take a look at your spending patterns.

Here are 7 tips for tracking your spending to create a realistic financial plan:

1. Keep a record

Something as simple as writing down each expense can go a long way. Try to make a habit of making a note of every cost that you incur. This can include day-to-day needs, such as groceries, phone bill, electricity bill, gas, dining out, gym subscriptions, and more. You must also add debts and liabilities like mortgage, loans repayments, credit card bills, etc. Having a list of monthly expenditure will present you with an accurate image of your spending. This will further help you to eliminate unnecessary expenses and save more towards unexpected contingencies.

2. Use automated payments

Dealing with cash can seem like an easy way of handling your finances. However, this can also be a bit misleading. It is hard to keep track of all your expenses when you pay your bills with cash. Even if you follow the step mentioned before this and write down all your spending, the chances of every cash payment making it to the list are bleak. Setting up automated payments can be an effective way around this problem. These days all banks offer this feature to setup payment for electricity, water, phone, loans, and more. You can also use a mobile application to do the same. While not all payments can be covered under this feature, it will still help you streamline your expenses and reduce your dependability on cash transactions.

3. Set aside a fixed amount

It is important to set a target for yourself so that you do not get diverted along the way. Fixing a specified amount for spending and saving will ensure that you do not falter. As a rule of thumb, many individuals like to follow the 40 – 60 rule wherein 40% of your income goes towards your monthly expenditure, and 60% of your income is saved or invested for the future. Having a fixed sum in your mind can be an effective strategy for the long run. While it may be tough to stick to it every month, it can be helpful to ensure that at least your gross income is aptly put to good use in investments and accounts that can fetch you profitable returns.

4. Avoid using credit cards

Credits cards can seem like a convenient monetary tool, but its excessive use can have many adverse implications. First, credit cards give you a false sense of financial liquidity. You may end up buying a lot of things on your credit card, but you will also be levied an interest to pay it back. Secondly, the failure to pay back your dues and overuse of your card can result in a poor credit score. This can affect your employability and the ability to secure a loan in the future. It is highly advised to not depend on credit cards for your daily needs. While credit card companies offer many attractive deals, air miles, and reward points, it helps to only use them for select purchases.

5. Aim for short-term goals

Short-term goals such as clearing your student loan debt, buying a car, or having a certain amount of money in your emergency fund can be good motivators. Every time you set a goal and then reach the target, you also get a sense of achievement that encourages you to do better. These short-term goals also act as rewards for your dedication and consistency. Otherwise, the budgeting process can sometimes seem restrictive and limiting. However, remember to aim for things that are realistic and can be achieved in a small span of time. Setting unattainable goals will only cause disappointment and frustration and may also lead you to steer away from the desired outcome.

6. Plan your investments

As you follow the 40 – 60 rule and set aside money for savings and investments, it is also crucial to know what and how you can increase the value of this money. Most common forms of saving would include the 401 (k) account or the individual retirement account (IRA), etc. However, you should keep in mind to not limit your funds here. Remember to diversify your portfolio with varied kinds of investment products. A well-balanced portfolio would contain real estate, bonds, stocks, equities, etc. When you invest your money, you can also consider automated deductions. This reduces errors and ensures that you do not end up misusing your money or overspending in other areas.

7. Do not forget taxes

Taxes are mandatory, but there are various ways to reduce your tax load. Effective planning and investing can be one way to ensure this. In addition to this, make sure that you are well aware of the tax provisions of your state. Use accounts that offer tax rebates or allow your money to grow tax-free to ensure maximum profits in the long run. You can also consult a financial expert to know how you can save money on taxes. Remember that this is your hard-earned money and therefore, it is important to use it efficiently.

To sum it up

Tracking your spending is not as cumbersome as it may look from the outside. All that you need is to follow a routine and to stick to it for the long run. Once you form a habit of saving, most of these tips will naturally find a way into your daily life. It is also essential to strike a balance at all times. If you leave little to no room for spending, you may find yourself frustrated and unhappy. You will also end up spending a lot more every time you relapse. On the other hand, only living in the moment can rob you of financial security in the future. So, while you enjoy the present, be prepared for what might happen in the future. Make sure to give equal importance to all aspects of planning and never burden yourself.

To know more about saving, investing, and curbing unnecessary expenditure, you can get in touch with professional financial advisors and devise a suitable budget for yourself.