how to create a spending plan

Posted : February 12, 2018
Last Updated : February 11, 2019

how to create a spending plan

One of the first steps to financial security is planning and following through on a personal spending plan or budget. Budgeting is about choices – choosing how to make money and choosing how to spend money.

Setting Financial Goals

Financial goals are specific to what you want to do with your money within a certain time period. Before you create a spending plan, you should complete the following steps to setting financial goals:
  1. Identify and write down your financial goals.
  2. Organize your financial goals.
  3. Educate yourself.
  4. Evaluate your progress.

Why Create a Spending Plan?

A good way to start taking control of your financial situation is to develop a personal spending plan. A spending plan is a step-by-step plan for meeting expenses in a given period of time.

Following a spending plan:
  • Helps you reduce the anxiety of not knowing whether you have enough money to pay your bills when they’re due.
  • Gives you a sense of control over your money, rather than letting money have control over you.
  • Helps you build assets that will improve the quality of life.

A spending plan is all about choices – choosing how to use your money. Knowing what your income and expenses are every month will help you take control of your financial situation.

Spending Plan Steps

There are four steps to preparing a spending plan:
  1. Keep track of your daily spending.
  2. Determine your monthly income and expenses.
  3. Find ways to decrease spending.
  4. Find ways to increase income.

Track Daily Spending

If you want to be in control of your money, you must understand where your money goes. Use this diary to track your spending over a period of time so that you can see how you’re spending your money.

Day What did I spend my money on today?

Determine Income and Expense

Income is money that comes to you from:
  • Wages
  • Self-employment income
  • Child support or alimony
  • Interest and dividends
  • Social Security Benefits
  • Other sources (e.g., tips)
  • Public assistance, which might include Temporary Assistance for Needy Families (TANF) or Food Stamps.

There are two categories of income: gross income and net income. Gross income is your total income without deductions. Net income is gross income minus deductions, such as Social Security tax and other taxes.

Social Security is a potentially valuable insurance plan. On some pay stubs, it is called FICA, which stands for Federal Insurance Contribution Act. Social Security income includes:

  • Retirement benefits paid every month to eligible retired workers, as early as age 62.
  • Disability benefits paid every month to eligible workers of all ages who have a severe disability.
  • Family benefits paid every month to spouses and children of eligible retired and disabled workers.
  • Survivor benefits paid every month to the eligible widow or widower and children of a deceased worker.
  • Medicare benefits paid as needed to help with hospital bills and offer limited coverage of stays in skilled nursing facilities, hospice care, and other medical services to people 65 or older and to younger people who are disabled.

There are two kinds of expenses: fixed and flexible.

Fixed expenses don't change from month to month. Your rent or mortgage payment is an example of a fixed expense.

Flexible expenses often change from month to month. You may have some degree of control over how much you pay. For example, if you decide to lower your thermostat during the winter to save on heating costs, you’ll pay less than you did the month before.

Identify Spending Plan Tools

Spending plan tools can help you better stay on track with your budget. Numerous tools are available, so select the one you are most comfortable with using.

Expense Envelope System
  • The Expense Envelope System is a useful tool if you pay your bills in cash each month.
  • Make an envelope for each expense category, such as rent, gas, electricity, and food.
  • Label the envelope with the name of the category, the amount, and the due date.
  • When you receive income, divide it into the amounts to cover the expenses listed on the envelope.
  • Pay bills right away so you’ll not be tempted to spend the money on something else.

Budget Box System
  • The budget box is a small box with dividers for each month, with one divider for each day of the month.
  • When you receive a bill, check the due date and place it behind the divider that represents the bill’s due date.
  • As you receive income, pay your bills right away so you won’t be tempted to spend your money on something else instead.

Electronic Options
  • You can create your own spreadsheet either online or on your computer, tablet, or smartphone. Put your income in the first column, the income date in the second, expenses in a third column, and a space under the expense column for your total expenses. Include a space to show income – expenses. Use the help function of your spreadsheet software for instructions if you don’t know how to use a spreadsheet.
  • You may also want to purchase a personal finance software program or download an app to your phone. They are usually inexpensive.
  • Using a computer to manage your finances is relatively simple. Once you set up the system, updating information is quick and easy. It’s important to enter transactions frequently to truly understand your financial position.

Tips to Help You Decrease Spending and Save More Money

  • Develop and follow a spending plan.
  • Carry small amounts of cash to limit your spending.
  • Eliminate or control your use of credit cards.
  • Avoid shopping "for fun" unless you have strong self-control to only window shop.
  • Take your written savings goals along with you as a reminder when shopping.
  • Buy only what you need versus what you want.
  • Use coupons to save money on items you need.
  • Use a grocery shopping list to prevent impulse buying.
  • Take your lunch to work instead of eating out.
  • Shop around for the best deals on big-ticket items, like cars and appliances.
  • Pay your bills on time to avoid late fees, extra finance charges, utilities being turned off, eviction, repossessions, and the costs of a bad credit rating.
  • Use direct deposit for your paycheck or federal benefits (e.g., Social Security). You won't have to pay to have your check cashed, or if you have a checking account, the bank may reduce or eliminate the monthly fee if you have direct deposit.

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