If you were to ask me what the most important step the average person needs to take in order to get a handle on their finances, I answer with this phrase, “don’t spend your money, allocate it!”
What’s the difference between these two phrases? Is there really a significant difference between spending money and allocating it? If so, what?
The difference between spending and allocating is as evident as the differences between enjoying a relaxing massage or having your entire body waxed. Both activities involved receiving contact over your entire body but one is pleasurable and decadent while the other is excruciatingly painful. With that said, your best bet to repairing your financial burdens is to develop the habit of allocating your money. Allocating is pretty much the same as budgeting but it has a more powerful ring to it. Budgeting carries a stigma, which is why most of us avoid it like the plague. Budgeting is the financial equivalent of a diet and most of us equate overspending with the mischievous act of having too many desserts.
Perception plays a huge role in how you handle your money. If you think of your money as a reward given to you for your 40 hours of work, you will spend it. If you see your money as an asset which can be used to generate more assets, you will allocate it wisely. When you spend your money you run the risk of allowing it to dwindle away. A person who spends their money usually has to take some time to account for it after the money is gone. The act of spending money is not a conscious action, the spending happens to your money, not the other way around.
Allocating your money, on the other hand, is completely different. A person who allocates their money is has a purpose for every dollar she receives. Someone who allocates their money realizes the value in their income and the benefits of using that money wisely. Some of the money is set aside for expenses, some for giving, some of the money is saved for emergencies, and another portion is dedicating specifically to creating wealth. The person who allocates wealth does not usually find themselves in a predicament where he or she broke with several days until the next paycheck.
So how do you begin to allocate your income?
Start with a plan. Your allocating should begin even before the money gets to your hand. Once you have the money, you simply proceed as planned. Follow the steps that you outlined beforehand and you have less to worry about when the money comes.
Create long term goals to keep you motivated. If you have a goal to get out of debt or buy a large ticket item, chances are you will have a hard time reaching that goal unless you become skilled in the art of allocating your income. Think of how good life will be to have reached that financial goal of yours.
Review your progress often. Writing down a plan is not good enough. You need to go back and see how you are doing. If you spend less than anticipated in one area, you need to adjust accordingly before you end up spending the surplus frivolously. If you spend more than you allocated in a certain area, you will have to make adjustments to your spending in other areas so you do not fall into the trap of the person who spends unknowingly.
Commit today to become a person who no longer spends without purpose. Your very next allotment of income should be allocated towards your purpose and goals. Make this process as easy as possible for you so you can stick to it. Focus on the long term benefits of this practice and use your goals as your motivation to remain consistent. Before you know it, allocating your money will be like second nature and you won’t have to worry about what to do when your paycheck mysteriously disappears long before the next one comes.
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