Why should I create a spending plan?
Have you ever taken a look at your year-to-date payment amount on the bottom of your paycheck and thought to yourself, where did all of that money go?
Do you know what percentage of your paycheck goes towards your housing, your groceries, or your weekly Starbucks drink?
Creating a spending plan can give you a break down of the big picture on where your money is going. Creating a spending plan gives you the right tools to make choices that allow you to stop endlessly working for more money, and instead, make your money work for you.
Having a plan allows you to make informed choices on what to purchase or how much to save, helps to reduce money-related stresses and anxiety, and can also help you build your assets and reach your financial goals.
So the real question here is, why shouldn’t I create a spending plan?
Here are some steps to help you get started with your very own, personalized spending plan.
Step 1: Track your spending
Take out your notebook, your excel sheet, or your bank statement, and make categories for what you have been spending your money on for the past few weeks. Tally up each of those Caramel Frappuccino's, those Hot-and-Ready pizzas, and grocery visits. Did you spend any money in cash this week? How about this month? How any times did you make a late-night Jimmy Johns order? Write everything down, or record it electronically.
Step 2: Find your Income
Do you work one or multiple jobs? Are your parents paying for most of your expenses? Do you have a work study? Did you receive a refund check from scholarships or excess financial aid? Do you babysit, mow lawns, or do any freelance work? Or, do you have a savings that you draw from to cover your expenses ever month? These are all different sources of income, among many others. Add up what money you have coming in every month to find your total income. To find the amount of your paycheck you will take home after taxes, visit www.paycheckcity.com/calculator/hourly.
Step 3: Identify all Expenses
Now it’s time to dig into the nitty-gritty details. You’ve already tracked your spending for the past few weeks, but what about the expenses that come once every few months? We like to call these forgotten expenses, or, expenses that pop up at random times throughout the year that can’t necessarily be put on every month’s spending plan. If you do any holiday shopping, or get your oil changed every few months, or buy new toothpaste, deodorant, or shampoo every do often but not on any particular schedule. Write these down, how often they would occur, and how much you would be willing to spend in each of these categories.
Step 4: Adjust the Numbers
Total up all of your expenses and all of your income. Do you have left over income, or an excess of expenses? To create a functional spending plan, you must follow one simple rule: your income must always be more than your expenses. If you have too many expenses, try to look at what you can cut out by first identifying your needs and your wants. Do you need the latest iPhone every time it comes out, or can you wait until you get a free upgrade? Do you need to pay to get your nails done every month, or can you purchase some nail polish and do it yourself every other month? Is it necessary for you to go out to the pub with friends when you know you’ve got a $500 rent payment coming up next week? Once you’ve established what your needs and wants are and you still don’t have enough to cover all of your expenses, it’s time to start reconsidering bigger options. Where do you live? Are you living in a nice apartment? Maybe consider down sizing, sharing a room with someone, or giving up some amenities for some extra cash in your pocket each month. Remember, your income must be more than your expenses, so if you’re still struggling to make ends meet after making cuts of non-necessary expenses, it may be time to consider increasing your income by picking up some extra shifts, tacking on a second job, finding a job with a higher hourly pay rate.
Step 5: Follow the Plan
Now that you’ve determined all of your expenses and all of your income, it’s time to make a plan you can follow. Use our Budget Builder to create your very own personalized spending plan. Based on the numbers you derived from finding your monthly income and expenses, create different categories and allot a certain amount of money from your monthly income to go into each category. For example, if when tracking your expenses you found that you spent $20 on coffee in the last two weeks, in my “Coffee” category I would place $40 for the month, and every time I spent money on coffee moving forward, I would keep track of it using an excel document, a budgeting app, or through my banks budgeting system, and would stop buying coffee once I had reached my $40 limit I had set for myself that month. Keep in mind that it is likely your spending plan won’t work the first time around. But don’t be discouraged! Keep coming back to adjust the numbers as your income and expenses change. Now that you’ve got a plan, you can start setting your own financial goals.