Taking Control of Your Finances, Part IV – The Spending Plan

By now you’ve been tracking your spending for almost four months and you should have a good idea of how much is going out and how much is coming in based on this spending record.  At this point it’s time to create a plan, a Spending Plan.  Budget is such a stodgy word with restrictive connotations akin to the word “diet”.  So, we’ll stick with the word “plan”.  A plan is flexible and subject to change.  It points us in the right direction but in life there are always detours that can set us back so we write out our plan and keep an eraser close at hand to make changes as needed.

The first thing you need to do is to put all of that spending into categories.  You decide which categories best fit your family but, in general, they will look something like this:  Mortgage (rent), taxes, phone bill, electric bill, water bill, tuition, insurance, groceries, eating out, miscellaneous, etc.  Try to place as much of the spending as possible into a specific category and not just miscellaneous.  You don’t want the miscellaneous category to start looking like your kitchen junk drawer!  Once all of the spending has been categorized, add up each category and divide that total by the number of months you’ve been tracking your spending.  For example, if the total for your grocery category is $1222 and you have been tracking your spending for three months you will divide $1222/3 = $407.33.  You’ve been spending an average of $407.33 on groceries every month.  These averages will help you to determine a base line for each category on your spending plan.

To help you determine the amount you place in each category for your spending, you need to understand the two different types of expenses:  fixed and variable.

Fixed Expenses – the total for fixed expenses stays the same every month.  Your car, mortgage and insurance payments are usually fixed expenses.  You can expect to pay the same amount on these categories every month.

Variable Expenses – the total for a variable expense category changes every month.  The devil is in the variable expense category.  Most of us will find the money leaking out of our spending plan in the variable categories such as gas, groceries, eating out, phone bills, etc.  They are the categories that are going to be more challenging to control.

Now it’s time to write up that plan.  There are many user-friendly tools available to the novice fiscal planner and it can be overwhelming but some have a free trial period so you can give them a try and see what works best for you.  Start with good, old-fashioned pen and paper and once you’ve got a rough draft you can then transfer it to a more elaborate system such as a spreadsheet (you will need a google account to access this monthly spending plan template), Mvelopes, Mint.com, Quicken or YNAB.  For most people, it will be beneficial to break your monthly spending plan into four weeks or by paycheck.  Few people are paid monthly so breaking your plan into weekly or biweekly columns allows you to see where your expenses fall within the month and which paycheck you can use to fund those expenses.

Start filling in the categories from your spending record.  Don’t panic if you find, like most people, that you have too much month at the end of your money.  That’s why you have that eraser handy!  There are two keys to getting the numbers within workable range – evaluating your needs vs. your wants and challenging yourself on those variable expense categories.  If you find that you don’t have enough money to fund all of the categories then it’s time to take a hard look at each category to determine whether or not it really is a necessity.  Do you need all 500 cable channels?  Do you need to go out to eat four nights a week?  Take a look at the variable expenses, as well.  How can you shrink that grocery budget?  Can you turn the thermostat up a few degrees in the summer and down a few degrees in the winter to save on the gas or electric bill?  Making sacrifices in the short term is, indeed, painful but the resulting financial freedom is so worth it.

Keep making changes until you have a plan that seems to work for you and then get started.  Continue to track your spending so that you have an idea of whether or not you are staying within your plan.  If you find that using a checkbook or debit cards is giving you too many opportunities to overspend then it might be time to take drastic measures and use The Envelope System:

·    Collect enough envelopes to cover each category of your spending plan and label them (Gas, Groceries, Entertainment, etc.)

·    Cash your entire paycheck

·    Divide the planned amount of cash into the envelope for each category

This method may seem extreme but for some it is the only way to help them avoid overspending.  Once the money is gone in a particular category you know it because the envelope is empty.  No more guessing how much is left in your account based on what you can remember spending.  If you plan to use The Envelope System and need to mail a payment you have the option of leaving the amount necessary for those bills in your checking account until it’s time for the payment, however, this might leave you open to the temptation to spend it when you run out of money in an envelope.  Another option is to purchase a money order.  It’s inconvenient and annoying but you will never bounce a money order and standing in that line every month could be just the incentive you need to get your financial act together.  

At the end of the month, take a look at your totals and recalculate if necessary.  It may take several months before you have a Spending Plan that fits your family’s needs but it is vital that you have one.  For the sake of your family’s financial future you must know how much money is coming in and how much is going out.  In your financial life, ignorance is not bliss.

Don’t forget to check out Mary Hunt’s book Debt-Proof Living .  It covers the principles we’ve been discussing in this series in greater detail.

Kim is a Worship Pastor’s wife and full-time mom to four crazy and beautiful kids. Toss in a part-time job, housework, a blog (http://www.fishbowlliving.com ) and what passes for a social life these days and she’s still wondering how she fits 32 hours into a 24 hour day.