Unless you happen to have the winning lottery numbers or you’re independently wealthy, you probably worry about your family’s finance. Maybe just a little. Or perhaps more often than you’d like.
It doesn’t matter if you’re just starting out, have a home and family with lots of expenses, or you’re on the verge of retirement, knowing how much money you have coming in and going out is necessary to keep your finances in order.
Developing a monthly spending plan will help you to not only stay on top of your financial well-being, but it will also help you to see if you have any budget drainers that you need to work on. Creating a budget isn’t a one and done kind of deal. You need to work with it regularly and test its limits to see if it’s working for you or if there are areas for improvement.
WHEN TO DEVELOP A SPENDING PLAN
If you’ve tried budgeting before and have failed, I understand and want to suggest something radical – stop budgeting.
Yes, stop budgeting and instead focus on why you’re having so much difficulty.
More than likely what you’ll find, as I did, was that your budget is unsustainable because you don’t have your spending under control and you don’t have your spending under control because you’re spending money everytime your life hits a snag.
Until you can conquer your emotional spending, you’ll always struggle to maintain a budget.
But, if you’ve graduated and find yourself out of “debt jail” and are doing pretty well because you’ve created a life that keeps you happy and fulfilled and is ready to start budgeting because you want to take your finances to the next level – here goes!
THE NUTS AND BOLTS TO DEVELOP A SPENDING PLAN
Over the next several months I’ll be sharing ideas for developing a spending plan each month to help you track your income and expenses, but let’s get started with the basic how-to so that you can develop a spending plan that works for you and your family dynamics.
First things first, you need to know how much money you’re working with. Calculate how much income you expect to receive each month, after taxes and other deductions. Be sure only to calculate the income that you can count on. If you’re not sure if something extra is coming in, don’t add it to your income line. It can be a bonus later.
If you have irregular income, sign up for the Money Rescue Program were I walk you through how to track and budget with irregular income.
Figure out how much money is going out every month by making a list of regular expenses. Things to think about include rent or mortgage, utility bills, insurance, car payments, minimum payments on credit cards and personal loans, and of course, food.
You’ll have fixed expenses which are expenses that never change and irregular expenses that change month to month like your electric bill or gas for the car.
Subtract your total expense line from your total income line. If there’s anything left over, you’re in good shape. If the number is a negative or not as positive as you’d like it to be, it’s time to look for ways to cut expenses or increase your income.
You’ll do this calculation each month because each month your expenses will more than likely change and annual events will come up.
This is the area where most people get into trouble. There are expenses that you only incur a couple of times a year so you forget to add them to your budget and set a little aside each month to cover them. When they come up, you suddenly find yourself short of funds. Extra expenses include things like scheduled repairs (oil change, tire rotations, home maintenance, etc.), co-payments or bills for medical or dental services, birthday and holiday gifts, vacations, and unexpected plans like a last-minute party. Calculate to the best of your ability the cost of these extra but expected expenses and subtract it from your above calculations. Hopefully, you still have money left over.
BUDGET FOR A CUSHION
To help you stay on top of the extra expenses and not get caught off-guard, build a little cushion into your monthly budget to help cover these expenses. If you’re not sure exactly what you’ll need, plan for 10%-12% of your monthly income to go into a fund to cover these expenses. Some months you may not need to touch that money at all and other months you may have three or four extra expenses that you need to cover. If you continue to put money aside each month you’ll be sure to have it when you need it.
REVIEW AND ADJUST
If your budget has balanced out to a positive number, that’s great. But if it hasn’t, it’s time to make some adjustments. Even if it ended up in the positive, you may still want to make adjustments to allow more money to be set aside for savings and investments. Look for areas you can cut back without too much difficulty at first. Cut back on how often you eat out, cut the premium channels from your cable service, review your data plan for your cell phone bill and see if you can reduce your service.
After those adjustments are made, you may want to look at more significant changes like cancel cable altogether for a streaming service, getting better at meal planning and grocery shopping, reducing coverage or increasing your co-pay on home and auto insurance plans. Keep making tweaks until you get it just right. This may take several months of review, but it will be worth it. And continuing to review your plan will help you stay on top of your financial situation. Review your plan at least once a month.
INVEST IN GROWTH
If there’s money left over, use it to pay down debt, add to your savings, or build your investment accounts. These are all things that will help improve your financial picture in the long run and can only be beneficial to you now.
LOOK FOR OPPORTUNITIES
To continue growing your financial independence, continually look for opportunities to increase your income and cut your expenses. The more income you have left at the end of the month the better off you’ll be. Consider starting a part-time business or getting a part-time job. Organize your house and sell off everything you don’t need at a yard sale then use the money to build your savings.
Cut extra expenses by trading babysitting with your neighbor for date nights or bartering for other services you need.
Opportunities are everywhere around you; you just have to look for them.
Now that you have an overview, you’re ready to get started. Plan a time around the end of the month to start developing your spending plan for the next month, so you’re ready to go on the first of every month. Review your plan and make adjustments as needed because no two months are ever the same.
Over the coming months I’ll be sharing ideas for developing your spending plan for each month, but to get started, follow the above steps to find your starting point. You need a clear and complete picture of your current financial situation to start moving forward in a positive direction.
Click on the month to learn what to do each month in our year-long series on Developing A Spending Plan.
July – Coming Soon!