Before you can begin creating your spending plan, you have to know exactly how much money you have to work with. Calculate your total earnings, after taxes, so that you know what your income will be. Only include income that you know you can count on.
Compile a list of your monthly expenses. Take everything into account, including your rent or mortgage, utility costs, car payment or transportation, debt repayment, entertainment, and any money you might spend on hobbies. Don’t forget to include the cost of food for yourself, your children, and any pets you might have. Any expense that tends to occur every month should go into this category.
Subtract your expenses from your income. This is the amount of money you’ll have left over after covering your monthly payments. Take a look at the month ahead and see if you can predict any expenses that do not occur every month. These expenses might include car or home repairs, dental or medical expenses, trips and vacations, gifts, social events, or clothing. Subtract these expenses as well, and take a look at the amount you have left over.
The remaining amount is called your ‘cushion.’ This is the money that would be available in an emergency in any given month. As a general rule, you should have 10% or so of your monthly income left after all expenses. If no ‘emergency’ expenses arise, you should save this money, slowly building up a savings account for you and your family.
But what happens if your spending plan ends up on the negative side? Or you don’t have a cushion? You’ll have to rework your plan. Take a look at your expenses and see if there are any areas you might be able to cut back in. While you probably can’t do much about your mortgage or rent, other expenses may be well within your control.
If cutting back doesn’t do it, you may have to find a way to increase your income. Perhaps a new job or taking on a second job will do the trick. Use whatever method you think will allow you to come up with a balanced budget that will get you through the month.
Once you have your monthly spending plan, it’s time to get it to set it in motion. This isn’t always as easy as it seems. Staying on track throughout the month can be challenging, but there are several systems you can use to try to control your own spending and follow your plan.
Many people find using envelopes a useful solution. Take a look at your budget and divide it into categories such as food, rent, entertainment, gifts, transportation, and so forth. Gather a few envelopes and label them with these categories, then put the money for each category in the envelopes. As you go through the month, you’ll spend the money in your envelopes. When an envelope is empty, you have nothing more to spend on that category. For example, if you want to go out to see a movie, but have nothing left in you ‘entertainment’ envelope, then you don’t get to see the movie. This is a simple and effective way to make sure you stick to your spending plan.
For those who don’t like cash, you can use your own bank account to track your spending. However, you have to keep very careful track of your purchases. Consider keeping a notebook or spreadsheet detailing your spending. The same rules apply here as with the envelopes: once you reach your spending limit for a certain category, you can’t spend any more. This method does take a little more willpower than the envelop method, and it is quite easy to overspend.
A monthly spending plan is a useful tool for controlling your spending. Make sure you plan well in advance for larger expenses, and track every penny. Also remember that no two months are the same. If you need to adjust your financial plan each month, feel free to do so. The point of a spending plan or budget is to help you cope with financial reality, not lock you into something that is unrealistic.
