Managing Money:
Making Your Money Work
Developing a Spending Plan
Now that you have a good idea of what your current income and expenses are, it is time to develop a spending plan. Most people believe they need more money to meet their expenses, no matter how much income they have. However, additional money may not always be the answer. More important is how you plan and actually spend your money.
The following are some signals that may indicate real money problems are down the road. Do any of these apply to you? Do you:
- Dip into savings to pay current bills?
- Pay only the minimum amount due each month on charge accounts?
- Delay payment of some bills you normally would have paid on time?
- Borrow to pay for items you used to buy with cash?
- Take out new loans to pay old loans or to get lower monthly payments?
- Really know exactly where your money goes?
Even if you answered "yes" to all of the above, there still is hope for you. There are things you can do to get more from your money and have greater satisfaction from your spending. You must understand that you have only a certain amount of money available to you and live within these limits. You may feel this is an impossible task, but it is possible for most people to accomplish.
Spending Plan
The secret lies in knowing where you are now, where you want to be in the future and figuring out how to get there. It's similar to charting your route to a new and unfamiliar vacation spot. You just have to find out which roads to take to reach your final destination, or in this case, your financial destination.
A successful plan
By now you know achieving a successful financial management plan requires that you make some difficult decisions. Here are some of the other things you may need to do:
- Gather the entire household together and have a discussion about what needs to happen in order for your family to reach its financial goals. It is very important for everyone affected by the plan to have some say in it.
- Decide what each person needs to do to help control the family spending.
- Provide every family member with a personal allowance if you can. The size is not as important as their personal choice in spending this money.
- Agree within the family that everyone will take turns getting what they want but everyone must also be willing to give up something.
- Learn and practice sound decision-making and shopping skills to get the most for your money.
- Make it a habit to save something, no matter how small, from every paycheck. Pay yourself first.
- Learn to live within your income and keep your credit use under control.
Some spending guidelines
Spending guideline percentages may be useful as you examine your spending habits. These guidelines are for comparison purposes only. They are not hard and fast rules. These figures are based on national data from the U.S. Department of Labor. Remember these show only the average expenditures of surveyed households, not the amounts families should spend.
One family may choose to spend 40 percent of their take-home (net) income on housing and less on clothing and transportation. Another may choose to spend more on transportation and less on housing. It's up to you to decide your priorities. However, when you are setting spending guidelines, make sure that the combined percentages equal 100 percent. Be sure to include all credit-related expenditures in the appropriate category, such as credit cards payments to pay for new carpeting. Housing, food and transportation take about two-thirds of the family budget and about one-third goes for all other expenses. That's where the challenges of money management come in.
| Housing (including utilities, taxes and maintenance) | 31.8-35 percent |
| Food | 15.6-20 percent |
| Transportation (including insurance) | 17-19 percent |
| Clothing and Services | 5-7 percent |
| Health Care (including insurance) | 5-9 percent |
| Entertainment | 3-6 percent |
| Savings (including retirement) | 2-10 percent |
| All other | 7-12 percent |
Note: All other includes alcoholic beverages, reading materials, education, tobacco, personal care, cash contributions, life and disability insurance and miscellaneous expenditures.
Are you wondering how to calculate your spending percentages? Here's an example. If you spend $350 a month on housing and your take-home pay is $1,000, you are spending 35 percent of your income on housing.
(350 x 100)/1000 = 35 percent
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| Calculator |
Use this calculator to figure your spending percentage.
The most important thing for you to remember is your take-home pay is like a pie. If you cut one slice too big, all of the other pieces will have to be cut smaller so everyone gets a taste. Otherwise there will be someone who won't get a piece of the pie. If you do this with your paycheck, you will probably find yourself having to borrow to make ends meet.
Make A Written Spending Plan
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| Spending Plan |
Follow the steps in the Spending Plan Work Sheet to help make your spending plan. These guidelines will assure you develop a money management plan that fits your special needs. If you follow each step, it also will save you from a complicated job of bookkeeping. This won't work miracles for you, but it will help show you the way to get the most out of your money. For a workable plan, the following steps are necessary:
- Add up your total income, including any funds you receive in addition to your earnings. Do not include any irregular income, such as overtime or bonuses, when calculating your total income.
- Figure out your total fixed expenses, such as rent or mortgage, insurance premiums or car payments.
- Provide for a savings/emergency fund that is adequate to meet emergencies and achieve special goals. Ideally your emergency fund will have enough money to cover three to six months of expenses.
- Estimate how much you need for day-to-day living expenses. While these steps are listed in sequence, it's likely you will arrive at your final estimates by considering them as a group. You may need to adjust the amount in each step until you have what you feel is a satisfactory plan. After going through each step and filling out the Spending Plan Work Sheet, you will have a better idea about where your money is going and how much you have left over.
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| Calculator |
Use this calculator to help you figure your income, expenses and savings.
Before you begin to work out your plan, it is important to remember good money management starts long before you begin keeping track of dollars and cents. Your plan is a personal or family matter. You need to take a long, hard look at your values. Your goals will reflect your values. No one can tell you what your lifestyle ought to be. Only you can decide how your income is spent. Effective money management will depend on how you choose to live and the goals you plan to achieve.
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| Spending Plan spreadsheet |
- If you are comfortable with computers, you can use this Spending Plan spreadsheet. You can make an estimate of expenses and record actual expenses for the month. Just save it to your computer or a disk.
So where do you cut expenses to keep the budget balanced? Travel? Clothes? Entertainment? Education? That's up to you. Think about where you are now and where you want to be in five or 10 years. Your long-term plan should reflect the goals you and your family have decided are most important. If your expenses were more than your income or you are looking for ways to cut expenses to increase the amount available for savings, the section on spending leaks will help you find ways to plug those leaks.
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| Cash Flow spreadsheet |
- You can use this Cash Flow spreadsheet to record estimated and actual income for the month. You also can enter the estimated and actual expenses from the Spending Plan spreadsheet for the same month. The positive or negative balance will show your cash flow for the month.
Plan for Savings
When making out your budget, plan for savings first. You can grow richer each month if you pay yourself first. Here's an idea you might want to try. Before paying any bills, determine an amount to pay yourself first–say 5 or 10 percent–of your paycheck. Then, deposit the amount into a savings account before paying any bills. Think of this as a bill you have to pay, just like any other bill. When you do this at the beginning of the month, your entire paycheck will not slip through your fingers. If you wait until the end of the month, there may be nothing left to save. Increase the percent you pay yourself until you reach 10 percent.
Paying yourself first gives you a systematic way to make your money grow. Regardless of the kind of job you have or your income, this system works.
Another technique you might try for saving money is to empty your change into a coffee can or jar each day. At the end of the month, roll the coins and put them into your savings account. You may be able to save up to $30 a month this way.
Remember, good money management is more than a mathematical formula. Family life is unpredictable, which is why savings are so important.
Your money management plan always is subject to change if your life situation changes. The objective of a good budget is to use your money to help reach your goals, not to force you to conform to rigid rules. Don't be discouraged if this budget plan doesn't work right away. You may have to revise it several times until it fits your wants and needs. Then review it from time to time to be sure it continues to help you use your income in the best way.
Determine How Much You Owe
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| How Much Do You Owe |
It is necessary to include all of your credit obligations as part of your expenses. Use the How Much Do You Owe Work Sheet to gain a clear idea of all of your credit obligations–both loans and credit card use. List credit–related expenses in the appropriate expense category.
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| Calculator |
Use this calculator to add up your credit obligations.
Next: What Is Credit and How Much Credit Can I Afford?
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