A Spending Plan Can Set You Free

After you've tracked your spending habits, identified spending leaks, and plugged the leaks, it's time to develop a spending plan. A spending plan is different from a budget, which focuses only on regular monthly bills. A spending plan is a tool that you can use for a lifetime.

With a spending plan, you look at the money coming in and the money going out and then find ways to balance the two. There are four steps to creating a spending plan:

1. Identifying your income

2. Identifying your expenses

3. Comparing the income with the expenses

4. Setting priorities

Every family member should be involved in developing the plan so everyone understands why certain decisions are made. Once the spending plan is created, one person should manage it by keeping track of income and expenses and paying the regular bills. He or she should balance the checkbook and monitor cash spending. Every few months, review the plan and adjust it to meet changes in income, expenses, or goals.

For a spending plan to work, it needs to be accurate. Don't overestimate the household income, and don't forget about bills due every few months. For those bills, set aside an average amount of money each month so the bill may be paid when it arrives.

The following steps will help you create a spending plan.

1. Identifying your income
   Determine how much money you and your family receive each month. Pay stubs, deposit records, and other records of income will help complete this step.
   
   
2. Identifying your expenses
   Determine how much money you and your family spend. List your expenses and don’t forget to include the items from your spending diary. If you have a checking account, refer to canceled checks or your account register. If you use a credit card, review six months’ worth of your statements and average the total amount spent over that period. Include receipts or invoices for items you pay every three, six, or 12 months, such as car insurance. For weekly expenses, such as gas, multiply the amount by four for a monthly total.
   
   
3. Comparing the income with the expenses
   Add up your income and expense lists. Compare the two. Do you have enough money to pay all your expenses? Great! If you don't, see Setting priorities.
   
   If you have money left over at the end of the month after paying your expenses, that’s even better. Now you can start paying yourself first by putting that money into a savings account.
   
   
4. Setting priorities
   If you’re outspending your income, or if you're just breaking even, you probably need to make some changes. Simply put, you need to either spend less by cutting your expenses or boost your income.
   
   To spend less, take a hard look at your expenses. Are there a couple of activities or expenses that you could do away with?
   
   To increase your income, you could ask your employer if you can get paid for working overtime. Or, you may want to look for a second job. Perhaps other family members can get part-time jobs to contribute to the monthly income.

The Spending Plan Worksheets, including Identifying Income, Listing Expenses, Comparing Income and Expenses, and Setting Priorities and Making Changes, will help you set up your spending plan. Once it's in place, use the Sample Family Financial Calendar to chart when bills are due so they can be paid on time.