Steps to Building a Spending Plan

Building a Spending Plan

Step 1: What are Your Financial Goals?

                                                                                                                                                                                                               

Nayda I.Torres, Josephine Turner, Brenda C. Williams, and Selena Garrison

            Everybody needs to learn how to manage money. Good money management includes being able to pay your monthly bills, saving for the future and being able to buy the things you need and want without creating un-manageable debt. A spending plan can be a very helpful money management tool. You can master the skills of money control and learn to conserve your income by using knowledgeable spending. Planning will help you extend your buying power. Good spending habits foster financial security and help to develop wise use of credit.

            By following this 6-step exercise, you can build a spending plan based on your finances. You can decide if you want to reduce debt, save to buy things for your home, or better control your spending so you can pay bills on time. You decide what you want to achieve with your money, and your spending plan will help show you how you can do it.

The first step in building your spending plan requires you to write down your financial goals. One method of doing this is to think about what you want to achieve financially within a certain number of months. What do you want? What do you want right now? Do you want to save money for a bicycle for your daughter’s sixth birthday later this year? What do you want later on that will take you longer to save for? Do you want to save money for a down payment on a house?

            If your goals are for a time less than a year away, then they are classified as short-term goals. If your goals will require one to five years to achieve, they are classified as medium-term goals. If your goals will require more than five years to achieve, they are classified as long-term goals.

Financial goals should be:

S – Specific – What exactly do you want to achieve?

M – Measurable – How much money will this goal take?

A – Adaptable – Is this goal adaptable for changes in your financial situation?

R – Realistic – Is this a goal that you can realistically achieve?

T- Timely – What is your time frame for achieving this goal?

Writing SMART goals will help insure that you are able to reach your goals. It takes commitment and effort to make financial goals a part of your daily life.

Use the worksheet on the next page to record your short, medium, and long-term financial goals.

Building a Spending Plan – Step 1                                                                                                                                                         ______2          

SMART GOALS WORKSHEET

Remember that financial goals should be:

S – Specific – What exactly do you want to achieve?

M – Measurable – How much money will this goal take?

A – Adaptable – Is this goal adaptable for changes in your financial situation?

R – Realistic – Is this a goal that you can realistically achieve?

T- Timely – What is your time frame for achieving this goal?

Using the chart below, write down three short term, median term, and long term SMART goals:

Short-Term Financial Goals (less than a year from now)
Purpose?	Amount of money?	By when?
1.
2.
3.
Medium-Term Financial Goals (one to five years from now)
Purpose?	Amount of money?	By when?
1.
2.
3.
Long-Term Financial Goals (more than five years from now)
Purpose?	Amount of money?	By when?
1.
2.
3.

Building a Spending Plan

Step 2: Where is your money going?

                                                                                                                                                                                                               

Nayda I.Torres, Josephine Turner, Brenda C. Williams, and Selena Garrison

                In order to manage your money, you have to know where your money is going. What do you buy? What monthly expenses       do you have? What are the different ways you can spend and encumber (make a promise to pay) money?

         You may know exactly how much you are spending or you may have no idea. A simple no-cost method of tracking your spending is by recording your expenses on a folded sheet of paper.

        

         Start with a plain sheet of 8.5” x 11” paper. (Notebook paper works just fine also). Fold it in half from side to side. Then fold it in half again two more times. This creates eight sections on each side. Label the first seven sections with each day in a week. Label the last section “Totals”.

         To use: Carry the folded paper with you and make a note of what you bought and how much you paid for each item every day. Don’t forget to record purchases put on your debit or credit cards. Record your purchases by day for a month. Total the expenditures by category in the eighth section. See the example below. At the end of each week, transfer your totals to the chart on the next page.

         This information will be helpful in Step 4 so be sure to keep the paper in a safe place like a file, a large envelope or a box.

Monday	Tuesday	Wednesday	Thursday
Lunch $4.75 Groceries $15.32	Gas $10.00 Lunch $4.85	Haircut $8.00 Soft drink $.75	Lunch $4.85 Movies $8.50
Friday	Saturday	Sunday	TOTALS
Lunch $2.50 Cleaning supplies $8.67	Laundromat $6.50	Pizza $8.59	Lunches: $16.96 Groceries: $15.32 Snacks: $9.34 Cleaning Supplies: $8.67 Gas: $10.00 Barber: $8.00 Movies: $8.50

Building a Spending Plan – Step 2                                                                                                                                                                                                                        2

Table 3 below provides a chart for you to total all your major categories for the month as you track expenses by the week. Your categories may be different than the example given, so just change them to make them fit your actual expenditures. A plain sheet of paper or a page of notebook paper can be used to list your expenditures as in the chart below.

Amounts Spent by Week
Categories	Week 1	Week 2	Week 3	Week 4	Week 5	Totals
Groceries
Eating Out
Snacks
Entertainment
Gas (for the car)
Personal (haircuts, etc.)
Rent
Car payment
Utilities (gas, water, electric)
Day Care
Clothing
Totals

The far right-hand bottom box on the chart will be your grand total for the month. It should be the total for the column above it as well as the total of all the weeks across the bottom. This chart will be helpful in completing Step 4, as well as showing you what bills (auto loan, rent, utilities) need to be paid in which weeks of each month.       

Building a Spending Plan

Step 3: How Much is Your Total Household Income?

                                                                                                                            

Nayda I. Torres, Josephine Turner, Brenda C. Williams, and Selena Garrison

             This is the step in which you determine your total household monthly income. For this step you need to know the net income, or what is left after deductions have been made from your wages or paycheck. This is the amount of money you have to purchase your needs and wants, as well as money to save.

            By filling in the chart below, you can total your family’s sources of monthly income.

Monthly Net Income From All Sources
You:
Full-time income:	Amount: $
Part-time income:	Amount: $
Child support/Alimony:	Amount: $
Public assistance/foods stamps/ WIC:	Amount: $
Unemployment/disability:	Amount: $
Social Security:	Amount: $
Retirement/pension:	Amount: $
Money from relatives:	Amount: $
Other:	Amount: $
Other:	Amount: $
Total:	Amount: $
Spouse/Partner:
Full-time income:	Amount: $
Part-time income:	Amount: $
Child support/Alimony:	Amount: $
Public assistance/foods stamps/ WIC:	Amount: $
Unemployment/disability:	Amount: $
Social Security:	Amount: $
Retirement/pension:	Amount: $
Money from relatives:	Amount: $
Other:	Amount: $
Other:	Amount: $
Total:	Amount: $
Other Family Members:
Full-time income:	Amount: $
Part-time income:	Amount: $
Child support/Alimony:	Amount: $
Public assistance/foods stamps/ WIC:	Amount: $
Unemployment/disability:	Amount: $
Social Security:	Amount: $
Retirement/pension:	Amount: $
Money from relatives:	Amount: $
Other:	Amount: $
Other:	Amount: $
Total:	Amount: $
Total of all above amounts	$

 

Building a Spending Plan

Step 4: Calculating Your Fixed, Variable, and Discretionary Expenses?

                                                                      ____                                              

Nayda I. Torres, Josephine Turner, Brenda C. Williams, and Selena Garrison

This step helps you record all of your expenditures each month. There are three major types of expenses in a spending plan: fixed expenses, variables expenses, and discretionary expenses.

Fixed Expenses are paid at regular intervals (monthly, quarterly, yearly, etc.) and have a fixed cost each time they are paid. Examples include:

·   Mortgage/Rent

·   Car payment

·   Insurance Premiums

·   Other Installment Loans

·   Credit Card Minimum Payment

Variable Expenses are also usually paid at regular intervals, but the cost may change each time they are paid. Examples include:

·   Utilities: water, sewage, electric, gas

·   Cable/Internet/LAN line

·   Cell phone

·   Groceries

Discretionary Expenses are those things that come up occasionally, or even frequently, but you have control over how much you spend each time. Examples include:

·   Dining Out

·   Entertainment

·   Tobacco/Alcohol

·   Shopping

·   Gifts/Donations

In terms of needs versus wants, needs generally fall into the fixed and variable expense categories, and wants generally fall into the discretionary expense category.

Now that you have tracked your expenses (Step 2), you should be able to accurately estimate you fixed, variable, and discretionary expenses. Use the following tables to estimate the amount and indicate the timings, if applicable (ex: monthly).

Fixed Expenses

Category	Amount	Timing
Rent/Mortgage
Homeowner’s/Renter’s Insurance
Car Payment
Car Insurance
Health Insurance
Other Insurance
Other Loans
Credit Card Minimum Payments
Other

Variable Expenses

Category	Amount	Timing
Cable TV
Water
Electricity
Gas
Phone
Internet
Cell Phone
Gas (Car)
Maintenance (Car)
Groceries
Additional Credit Card Payments
Other
Other
Other

Discretionary Expenses

Category	Amount	Timing
Birthdays Gifts
Holidays Gifts
Religious Donations
Other Charity Giving
Dining Out
Vacations
Movies
Other Entertainment
New Clothes
Personal Care (salon, spa, etc)
Other
Other
Other
Other

Total all of your monthly expenses in the following table:

Total monthly payments=	$                      per month
Total quarterly payments divided by 4 =	$                      per month
Total bi-annual payments divided by 6 =	$                      per month
Total annual payments divided by 12 =	$                      per month
Total of all monthly expenses	$                      per month

Building a Spending Plan

Step 5: Are You Living On What You Make?

                                                                                                                            

Nayda I. Torres, Josephine Turner and Brenda C. Williams

Now that you have calculated your income (Step 3) and totaled your fixed and flexible expenses (Step 4), it is time to do another calculation. You need to determine by simple math if you are living on what you make (total expenses do not exceed total net income) or if you are spending more than you make (total expenses exceed total net income). Use the following table to do these calculations:

Total Income (Step 3),	$_____________________________
Minus	__
Total Expenses (Step 4)	$_____________________________
Total Surplus/Deficit	$_____________________________

If you total income minus expenses is positive, this means that you are making more money that you are spending. This is called a surplus. Your extra income, or surplus, is available for you to use for additional savings or to reach your short and long-term goals. For example, you can save all or part of it, you can purchase something with the money, or you might pay it as an extra payment on an installment loan or mortgage.

If your total income minus expenses in negative, this means that you are spending more money than you make. This is called a deficit. You will want to reduce your monthly spending by at least that amount. This can be done by going back to Step 4 and taking a look at where you can lower your spending. Start with the discretionary spending category. Are they ways in which you can reduce your spending here? Maybe you can cut down on eating out and cook at home instead. Next, look at the variable expenses. May you can get a less expensive cable package, get rid of your home phone if you have a cell phone, or pay closer attention to amount of energy you use. Another option is to try to earn extra money through odd jobs, mowing lawns, etc.

Do this step monthly after you have made purchases and paid bills. If you are overspending, make a plan to adjust your spending for the current and coming months so you will get back on budget. It will be increasingly difficult to reach your short and long term financial goals if you continue to overspend. Overspending usually results in debt that becomes difficult to pay off.

Remember that you can change your spending plan. As expenses change, seasons change, and life changes, the spending plan should be adjusted accordingly.

Building a Spending Plan

Step 6: Creating Your Plan and Sticking to It

                                                                                                                                                                                                                  Nayda I. Torres, Josephine Turner, Brenda C. Williams, and Selena Garrison

                You can modify your spending plan. If your income increases, add the amount to the income sheet in Step 3 and Step 5. If you reduce your spending, subtract that amount on the appropriate table in Step 4 and Step 5. This will allow you to compare the new total income and expenses in Step 5.

       To make your spending plan a financial management tool, you will want to complete the attached tables. At the beginning of each month, write down the expected costs. Throughout the month, as you pay the bills, write down the actual costs. By comparing the planned expenditure amount with the actual amount spent in each category, you can quickly see if you are staying on budget.

       If your actual amount is equal to or less than your planned amount, then you are staying on budget. If the actual amount is more than the planned amount, you are over-spending. Go back to Step 5 to see if you can think of ways to cut expenses. Then make those cuts in Step 4 so you will not be over budget next month.

            Tracking your expenditures in this manner each month will quickly get you back on budget, if you make the necessary adjustments. Tracking expenditures will also help you find out exactly how much you can spend and save to achieve your short and long-term goals.

            Get into the habit of keeping and organizing your records. Keep receipts, bank statements, pay stubs and check registers in a safe place. They are important for your spending plan as well as at income tax time.

            Keep your spending records simple and in a convenient place. You will want to refer to them periodically as suggested in these steps.

            Try to eliminate unnecessary expenses. Review your financial goals. Does more money need to be directed toward your goals and less money toward current expenses? What expenses can you cut down or out?

            Pay your bills on time. That saves you money in not having late fees. It also builds your credit rating.

            Remember to review your spending plan each month by using the following tables. They will help you stick to your spending plan so you have money available to put toward your financial goals. Reaching your goals will provide great satisfaction as you practice better money management.

Monthly Budget

Month________________             Year___________________

Category	Budgeted Amount	Actual Amount
Fixed Expenses
Rent/Mortgage
Homeowner’s/Renter’s Insurance
Car Payment
Car Insurance
Health Insurance
Other Insurance
Other Loans
Credit Card Minimum Payments
Other
Variable Expenses
Cable TV
Water
Electricity
Gas
Phone
Internet
Cell Phone
Gas (Car)
Maintenance (Car)
Groceries
Additional Credit Card Payments
Other
Other
Other
Discretionary Expenses
Birthdays Gifts
Holidays Gifts
Religious Donations
Other Charity Giving
Dining Out
Vacations
Movies
Other Entertainment
New Clothes
Personal Care (salon, spa, etc)
Other
Other
Other
Other