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| Cash and Debt ManagementConstructing a Spending PlanYou’ve thought about your goals and priorities, examined your attitude towards money, put together a balance sheet, and done a cash flow analysis. Good work! The next step is to take all you’ve learned and put together a spending plan that works for you.
You have a certain amount of money available to you. You can spend it any way you choose. What are the choices that are best for you? How do you plan your spending so that it’s in line with your goals and priorities?
Time Frame
Think about how to build your plan. For most people, a plan built around their pay period works best. It could be weekly, or every two weeks, or twice a month, or monthly. If you have two incomes with two different time frames, then it usually works best to center the plan around the larger check. Use the worksheets provided in this section of the website as a reference, or try one of the electronic alternatives that can be found on the internet.
Fixed And Variable Expenses
Payments you are committed to are called fixed expenses. Things like taxes, rent, mortgage payments, loan payments, or insurance. In reality, however, few expenses are set in stone. You can move to a cheaper apartment or sell your house and buy one that’s less expensive. You can raise the deductible on your insurance. You can even decide to make less money and pay fewer taxes!
Expenses you have significant control over or which change from month to month are called variable expenses. These are things like food (you can avoid brand names at the grocery store), utilities (turn off the lights), clothing (wear it out), and gasoline (carpool).
Focus on variable expenses first when you are developing your spending plan.
The first questions to ask:
- Do you pay yourself first? Do you set aside money for savings first, and spend what's left? That’s the best approach to a spending plan.
- How much of your money is spent on convenience foods and eating out?
- Do you buy your clothes at outlets, garage sales, or used clothing stores, or do you pay full retail prices? Do you need all the clothes you buy?
- Can you save money on vacations by swapping houses with someone or camping out?
- Do you change your own oil and do routine maintenance on your vehicles or do you pay someone to do it?
- Can you live without cable TV and make fewer long distance telephone calls?
- If you have a recreational activity you regularly pursue, can you do it at off-peak times?
The choices are up to you. It all depends on what you are trying to achieve. If eating out is your favorite thing in life, you should find a way to afford it. If you love clothes, make them a priority. The point is to find out what it is you really want, and focus your resources there. Reduce or eliminate the things that don’t mean as much.
Go back to your expense record again. How many of the things you bought were worth it? Aren’t there items on that list you can’t even remember buying? Or look at your bank statement and try to remember where all the dollars went that you took out of the cash machine. If you don’t know, chances are those things weren’t that important to you. Shouldn’t they be the first things to go?
Case Study: Jennifer Juniper
The pages to follow show three examples of cash flows for Jennifer Juniper. Let’s use Jennifer as an example of how things can go wrong and what can be done to fix them.
Jennifer is a single person making $30,000 per year. It isn’t nearly enough. As you can see from her first cash flow, she’s spending $526 more than she’s making per month. She’s got payments on her credit card as well as loans of $350 per month. She eats out a lot, and she buys nice clothes. She calls her friends and talks for hours. She takes great vacations.
Cash Flow #1: Out of Control
| Monthly Total Savings/investing |
$0 |
| Federal & state taxes |
556 |
| Mortgage or rent |
700 |
| Home repair/maintenance |
50 |
| Property taxes |
0 |
| Life insurance |
10 |
| Home/renter’s insurance |
10 |
| Auto insurance |
75 |
| Credit card/loan payment. |
350 |
| Utilities & telephone |
200 |
| Food (incl. eating out) |
250 |
| Clothing |
150 |
| Grooming |
50 |
| Gasoline |
100 |
| Auto repair/maintenance |
100 |
| Other transportation |
0 |
| Medical care |
50 |
| Education |
0 |
| Child care |
0 |
| Alimony/child support |
0 |
| Entertainment |
100 |
| Vacations |
100 |
| Gifts/charitable contributions. |
50 |
| Laundry/cleaning |
25 |
| Other: |
100 |
| (a) Total Expenses |
$3,026 |
| (b) Income |
$2,500 |
| (c) Cash Balance (b) - (a) |
($526) |
In the next example Jennifer has consolidated her loans and credit cards at a lower interest rate, so her payment is lower. She’s saving enough on interest to pay her debt off faster, too. She’s cut her expenses. She stopped buying life insurance because she’s single and doesn’t have any dependants. She’s eating out less. She’s getting her hair cut at a beauty school instead of at the mall. She’s going to spend less on her vacations. She’s saving a little bit each month, building up an emergency fund.
Cash Flow #2: Making Ends Meet
| Monthly Total Savings/investing |
$25 |
| Federal & state taxes |
556 |
| Mortgage or rent |
700 |
| Home repair/maintenance |
40 |
| Property taxes |
0 |
| Life insurance |
0 |
| Home/renter’s insurance |
10 |
| Auto insurance |
75 |
| Credit card/loan payment. |
300 |
| Utilities & telephone |
134 |
| Food (incl. eating out) |
200 |
| Clothing |
50 |
| Grooming |
25 |
| Gasoline |
100 |
| Auto repair/maintenance |
100 |
| Other transportation |
0 |
| Medical care |
50 |
| Education |
0 |
| Child care |
0 |
| Alimony/child support |
0 |
| Entertainment |
50 |
| Vacations |
50 |
| Gifts/charitable contributions. |
25 |
| Laundry/cleaning |
10 |
| Other: |
0 |
| (a) Total Expenses |
$2,500 |
| (b) Income |
$2,500 |
| (c) Cash Balance (b) - (a) |
$0 |
In the last cash flow example, Jennifer’s made more big changes in her life. She pays fewer taxes, because she’s putting money into her company retirement plan and, therefore, does not pay tax on that money. She has a cheaper apartment, and she’s paid her credit cards and loans off. She does her own oil changes and minor auto repairs, saving money on maintenance. She makes very few long-distance calls, preferring to email. She doesn’t buy convenience food or eat out as often. Her reward? Being able to put $600 per month into savings. Jennifer is well on her way to realizing her financial dreams.
Cash Flow #3: Super Saver
| Monthly Total Savings/investing |
$600 |
| Federal & state taxes |
470 |
| Mortgage or rent |
600 |
| Home repair/maintenance |
40 |
| Property taxes |
0 |
| Life insurance |
0 |
| Home/renter’s insurance |
10 |
| Auto insurance |
75 |
| Credit card/loan payment. |
0 |
| Utilities & telephone |
120 |
| Food (incl. eating out) |
150 |
| Clothing |
50 |
| Grooming |
25 |
| Gasoline |
100 |
| Auto repair/maintenance |
75 |
| Other transportation |
0 |
| Medical care |
50 |
| Education |
0 |
| Child care |
0 |
| Alimony/child support |
0 |
| Entertainment |
50 |
| Vacations |
50 |
| Gifts/charitable contributions. |
25 |
| Laundry/cleaning |
10 |
| Other: |
0 |
| (a) Total Expenses |
$2,500 |
| (b) Income |
$2,500 |
| (c) Cash Balance (b) - (a) |
$0 |
Take some time to complete a Cash Flow Worksheet
Family Planning
Trying to come up with a spending plan is hard enough for an individual like Jennifer. But she’s only deciding for herself. How do you make this work if you’re part of a family?
You have to talk about it. It used to be that one person made all the money decisions in a family. The problem is that unilateral decisions don’t work very well in the long run. So, even though it takes more time and effort, you need to sit down and hammer the issues out.
Forecasting Income And Expenses
Making predictions for future spending typically depends on your age.
To Age 35
In your spending plan, allow for:
- paying off student loans
- buying a house
- combining incomes with a spouse
- starting a family early
- saving for emergencies
- retirement (it’s never too soon!)
Age 35 To Age 50
Think about:
- emergency funds
- non-working spouse
- paying off the credit cards
- taking care of aging parents
- college for the kids
- retirement getting closer
Age 50 And Above
Things to consider:
- lifestyle changes in retirement
- increased health care costs
- smaller house?
- adult children moving back home
- more travel?
- emergency funds (always)
- eating out more?
- paying off mortgages and loans
- no work clothes
- no commuting
More Things To Think About
Be realistic. If you spend $500 a month for food now, you are not going to be able to cut it to $100 next month.
- Do things gradually. Cut your expenses in any given area by 10% or so at a time. See if you can live with it. Then cut a little more.
- Make allowances for inflation. The cost of goods and services goes up a little bit each year. Historically, the amount is between 3 and 5 percent.
- Expect the unexpected.
Live your life by the 10% Rule: If you learn to save 10% of your gross income, you will be well on your way to reaching your financial goals.
Article Content by Truebridge, Inc. All rights reserved. Copyright 2001-2010 |
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