Realistically planned personal expenses and spending help not only staying out of debt but also help saving some cash. But the most important outcome is that it gives piece of mind preventing unpleasant surprises such as overdraft or carrying over credit balances from month to month. The planning involves three easy steps: know your monthly net income, break the budget into key spending categories, project daily spending.
Step 1 – Identify You Monthly Net Income
This is where you need to set your spending overall limit. The more aggressive you set it the safer your spending habits will be. In most cases it is the monthly or biweekly paycheck. To make it more aggressive this should include (or more precisely, exclude) savings such as 401K. To go even more aggressive consider allowing withholding more taxes – it will be returned in the end of year as tax refund but it will keep you from spending it on monthly basis. In general, think of it as artificially but forcefully lowering your spending abilities. They money are still yours, it’s just not available for spending.
Step 2 – Break Your Budget In Key Spending Categories
Now that you know you monthly spending abilities, break it into key categories. Example:
- Internet, Phone, TV
- Extra classes
- Extras, fun
For each category specify how much money you would reasonably spend monthly. You know exactly how much rent you pay. Utilities may vary depending on the season, but you should be aware of the lows and highs so it can help you calculate the annual average. You should be aware of how much gas you need or how often and how much you fill the tank. And so on. It should not be an exact science rather guestimates. Make sure you do not neglect Unexpected category. Unexpected happens, you just do not know when. If it doesn’t happen consider it as saving, nice surprise, eh?
Once you specified the amount for each category you can easily summarize and see if this is below or above your monthly net income you identified in Step 1. If it is above do another iteration cutting on what seems reasonable to cut from. Do not cut from Unexpected, take my word for it.
Step 3 – Project Daily Spending
This is where you do a dry test run for your high level plan. To test it spread all possible expenses over the 30 day period. For example spread 100 dollars for each week for food, then set 60 dollars gas each week. The test part comes into play when you summarize relevant categories entries, say, food and compare it to what you specified for this category. For example, if you put 100 dollars to spend weekly on food and it looks reasonable to you then you should have 400 dollars in this category specified in Step 2. If you specified less then 300 then you are unable, according to your plan, to spend 100 dollars weekly on food. Do the same testing for each category to make sure you have reasonable monthly spending plan.
Once you are happy with the plan and it sticks, it’s time to rubber hit the road. It means you would need to record each expense you make throughout the month no matter what’s been used to make it – credit card, cash, or wire transfer – and compare to what was planned in first plan. By the end of the month you would compare how realistically you planned it and what adjustments need.
- How To: Create Personal Finances Spreadsheet Using Microsoft Excel
- Money Management Practices That Keep You Out Of Debt
image by Slightlynorth