Most people drudge making budgets. I must admit, so do I. So, I focus on utilizing a personal spending plan instead. Spending plans promote another way of thinking about how we manage our money. They allow for greater flexibility and control over how we spend our income by providing categorized spending and the ability to easily redirect funds to attain goals. To maximize the use of a spending plan, pair it with financial goals to provide a path to meeting those goals short and long term. Don’t view the plan as just a means of sorting your income from month to month, but a tool to attaining financial health and reaching your goals.

There are two things you need to do before starting your personal spending plan: 1) set your financial goals and 2) download a blank copy of my free 4-Part Spending Plan you see above (Excel format). Figure out where you want to be financially at the end of this year, 5 years from now or even in retirement. Make sure to be very specific with your goals, taking the time to determine the difference between your needs and wants. This means you should understand your spending patterns. Tracking your spending habits for 1 to 2 months will help you to recognize your patterns. Aim for an attainable and realistic target with a definite time frame. Then narrow down your future goals to make manageable monthly goals. Finally, separate disposable from discretionary income and categorize all sources of spending. Use the 4-Part Spending Plan to allocate your funds in a way that will help you reach your monthly and future financial goals. As you work through your goals and the spending plan, keep in mind that you have the flexibility to make adjustments where needed while staying mindful not to spend more than you earn. Move money to areas you want or need more and determine those categories to spend less. The spending plan breaks down the disposable and discretionary income into 4 major categories: Must Spend, Must Save, Want to Give and Want to Spend. These groups are further defined below, but first let’s touch on income.

Income

Before we get into the details of what we’re going to spend let’s first determine what we have available to spend. The income, also known as disposable funds, can include our salary, any bonus’, interest and dividends from investments, alimony and any other funds we may receive in a month’s time.

Must Spend

The ‘Must Spend’ category includes all those items that you spend your money on to survive – the basic necessities. Items such as food and water, clothing, shelter, your electric and water bills, home mortgage or rent, and transportation are a few examples of the ‘Must Spends’. These expenses should be amongst the first of the items that your funds are allocated to. The money remaining after you take care of the needs is your discretionary income. Divide the discretionary funds amongst the remaining 3 categories -> Must Save, Want to Give and Want to Spend.

Must Save

People commonly say, ‘I need to start saving money’ and have full intentions to do so. Nevertheless, how many of us are taking action to put something aside consistently? Well as of 2015, the America Saves/American Savings Education Council reported that 66% of adults surveyed stated they were saving at least some of their income. I think the savings should go in the ‘Must Spend’ category, as if it were a bill that needed to be paid each paycheck period. But I want to make sure it is something that’s always visible to serve as a reminder that it must be a part of the spending plan no matter what. Our savings is what we set aside for financial emergencies and to financially secure our future. It should be the first of our non-essential funds we actively put away in a secure account. A popular quote by Warren Buffett states, “don’t save what is left after spending; spend what is left after saving”. This is some of the best advice that we can go by to ensure we are securing our future financially and meeting financial goals. A general rule of thumb is to put away 10% of each paycheck. However, savings is one of the categories that can be adjusted up or down depending on what you can manage after your needs are met.

Want to Give

This category is fairly self-explanatory. The ‘Want to Give’ group is the money that I desire to donate to support my favorite causes such as the charities that I’m fond of, my niece’s school band, my nephew’s football raffle tickets, my local church and so forth. Some may consider giving a necessity and may be tempted to add these funds to the Must Spend category, but recall Must Spend is to cover basic needs. Giving is definitely an area that can be adjusted, like the savings, to meet other obligations if needed. Because you have full control of how you spend your money, if items in the ‘Must Spend’ category are not being met, adjust the amount you are giving and saving temporarily and then adjust it back once your necessities are met. This works the other way around as well. If you find that you have an abundance of money left after your needs are met, then you might decide that you would like to increase the funds that you are giving and saving. I think you get the idea.

Want to Spend

The ‘Want to Spend’ category are all the leisurely type of items that you enjoy spending money on. The ‘fun money’ I like to call it. I “want to spend” my money on a night at the movies, an international excursion, or a new car. The funds in the spending category comes from discretionary income, the portion of income available for spending on non-essential items after basic needs and prior commitments or obligations have been met.

Now to bring this all together, remember you control your money and your spending, it does not control you. Determine your monthly take-home pay whether its paid weekly, bi-weekly, or monthly. Total all monthly set expenses, from the Must Spend category. Subtract this sum from your monthly take home pay. The remaining amount is your discretionary income to be split between the Must Save, Want to Give, and Want to Spend categories. When determining how to balance the remaining amount between the groups, recall that the typical amount for savings is a minimum of 10% of your take-home pay. So you’ve learned the ins and outs of creating a plan for your finances. Download a free copy of the attached Spending Plan, in Excel format, and get started on your road to a financially new you!

Always keep in mind to stay within the boundaries of your earnings. As previously stated, discretionary income is only the income that is left over. If you’re finding that you do not have any discretionary income, then you will want to seek out additional sources of income such as negotiating a raise on your job, seeking out a higher paying job altogether, or find a side gig. A temporary solution is to adjust the savings, giving, and spending categories. Remember at the beginning of the article, I explained that in utilizing a personal spending plan, we have control. So, take the time to vary areas of spending to accommodate your needs. You can adjust your numbers in each category and watch how it all effects your total outcome in the totals and the graph on the right side of the 4-Part Spending Plan. What you do not want to do is turn to credit cards or loans to fill deficits. In doing so, many people get themselves into trouble financially as they may unintentionally make a habit of using credit whenever there is no money left over after bills. Using credit and loans for discretionary spending is a fast track to financial ruin.

Conversely, if you find that you routinely have a substantial balance left after meeting your necessities and even after dividing the discretionary income amongst savings, giving, and spending, consider allocating more funds towards savings, investments and retirement funding. Additional financing in these areas will quickly build your emergency fund and increase your future income for retirement.

The purpose of a successful personal spending plan is to take control of your finances and achieve your financial goals. The plan will assist you in developing and sustaining healthy spending habits within the boundaries of what you earn and keep you out of debt. You will find that this method will provide for financial emergencies and help to secure your financial future. Download the free 4-Part Spending Plan and get started on a financially new you today!

Share on Facebook

Tweet

Follow us