Alright, you get it. A spending plan is an important financial tool and you should create one. You’re now wondering how you are supposed to do that. Let’s start by showing a simple example of a spending plan. After seeing a spending plan, the process of creating one will make more sense.
Meet Bradley Davis. Bradley is a 19 year old college student. Bradley’s parents are helping him pay for college, but he is expected to cover all of his living expenses. Bradley works part-time at the local Pizza Palace in order to cover his normal living expenses as well as support his addiction to golf and Taco Bell. He uses an electronic application on his smartphone to help him closely monitor his spending.
That’s it! That is all a spending plan is! Of course, Bradley still has the job of putting the spending plan in place and tracking what he actually spends his money on. Do you think he can harness his golf addiction to fit within his budgeted entertainment amount?
Now it’s your turn. We have split the process of creating a spending plan into 5 easy steps for you:
Track your current income and expenses for the time period that you would like your spending plan to occur. For most people this time period matches their pay period (weekly, bi- weekly, monthly). For Bradley, this is once per month.
In order for a spending plan to work, it must be realistic and actually reflect what you earn and spend. You could just estimate how much money you spend, but do you really think your estimates would be accurate? Think about all of the little expenses- a daily soda, coffee, or snack, a monthly haircut, etc.
Create personal income and expense categories. These categories should be based off your tracking from step one. Bradley’s categories included savings, rent and utilities, cell phone, and college costs.
Use the information from step 1 and 2 to determine how much money you plan to spend in each category.
It is very important that these amounts are realistic or else you will have a hard time actually sticking to your plan. This may require you to make some tough decisions. Bradley decided to not purchase a car and uses the money for entertainment and eating out instead.
Subtract your expenses from your income.
Are your expenses more than your income? If so, you are spending money that you don’t have! You will need to adjust your spending plan by either decreasing expenses or increasing income.
Are your expenses less than your income? That’s great! Add whatever money is left to saving or investing to create a zero balance for your spending plan (because money has to go somewhere).
Now you will put your plan into action. During this time, you will need to monitor your spending to ensure your spending plan is working for you. There are several different ways to monitor your spending. It doesn’t matter what method you use as long as it works for you. Examples include:
The Envelope System – Use envelopes with the categories labeled on the front. Place the budgeted amount of cash into each envelope. When the money is gone for that category… it is gone. An alternative is to place receipts inside the envelope instead of cash.
Check Register System – Use a check book register that has been divided into your personal spending plan categories. Add each expense to the corresponding section of the check book register and add the totals.
Electronic Spending Plan Systems –there are multiple types of software available that can be used to help you keep track of your spending. Many programs will have smartphone and tablet applications as well, so you can access your current spending from anywhere and everywhere (that means you should have no more excuses!).
Not so fast…your job isn’t over quite yet! This is the last and perhaps the most important step in the process. This is where you determine if your spending plan is working for you and make adjustments if necessary. For example, if you notice that you are consistently spending more or less in a specific category, you will want to adjust.
You can use this Excel spending plan template to help you create your spending plan. Remember to customize the categories to fit your personal needs. And remember, when creating a spending plan:
Make sure your spending plan is realistic!
Make sure your spending plan works for you!
Make sure to maintain your spending plan to ensure it continues to help you with your finances!