Key concepts of a spending plan
Learn the basics of a spending plan
Before you create a spending plan of your own, think about these key points.
The basic idea is simple: You’re going to write down how much money you have coming in during an average month and then decide how you’re going to spend it. But, the trick is to live within your income — so that you can pay your expenses but still have some money left-over for your own flexibility.
Another important decision is how much to save. It’s up to you to decide how much of your money you’re going to set aside for your own future.
Review these concepts to get the background information you need to create a spending plan that works for you.
Spending plan concepts
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Be sure to record all your sources of income — your Social Security payments, retirement plan withdrawals, investment dividends, etc. And, if you’re working, don’t forget your take-home income. Base your spending plan on all your income sources.
To get a clear picture of how you actually spend right now, it may help to keep a spending diary for a month or two. This means saving your receipts and writing down the items and amounts for everything you spend.
Your bank may offer online tools to help you automatically track your spending and categorize it by expense types so that you can see where your money is going. These online tools are often free.
There are three types of expenses: fixed, flexible, and discretionary. It’s important to know the difference among the three.
Fixed expenses are regular amounts that generally don’t change much. They can be monthly expenses like rent or car payments. Or they can be bills you receive less frequently, like car registration or insurance.
Flexible expenses also happen on a regular basis and are also for necessities. But, with flexible expenses you have more control over how much you spend. For example, how much you spend on groceries or how many long distance phone calls you make in a month.
Finally, there are the expenses you have the most control over. These are called discretionary expenses. This is the money you choose to spend, but don’t necessarily have to spend on things like clothes, movies, and going out to eat. Another important discretionary expense is savings. It’s up to you to decide how much of your money you’re going to set aside for your future.
After writing your spending plan, you may find that there’s not enough money to go around. Since your fixed expenses may be difficult to change, look for ways to decrease your flexible and discretionary expenses and/or, increase your income.
Most people can’t afford everything they want to buy, so they have to make trade-offs. Making trade-offs may mean giving up things you can do without, or buying something less expensive that still meets your needs, in order to afford the things that are most valuable to you. The idea of making trade-offs may also relate to how you spend your time. For example, to make more money at your job, you may have to work longer hours.
Create a spending plan you can live with. Be realistic and flexible. Review your plan every month. Adjust it as your income and expenses change.
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