The Spending Plan
The idea behind a spending plan is to look at a years' worth of income and expenses. This is in order to plan ahead and see that your income can cover your needs for the year and not just the current month.
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There are different categories of expenses. A spending plan should address all of them. Here's a breakdown of fixed, variable and periodic expenses. Fixed expenses are the same dollar amount each month. Examples of fixed expenses are rent and mortgage because these expenses usually stay the same month after month. Variable expenses fluctuate monthly. Examples would be utilities and food because we may pay more money in these categories one month and less the next. Periodic expenses do not occur monthly but sporadically such as car repairs, vacations and holiday gifts. Some of these expenses are foreseeable such as vacations and holiday gifts and some are unexpected such as car repairs and medical expenses. It is not possible to know what will occur during any given year but estimating an average amount for these categories and putting money aside to cover the more common possibilities will help when they do occur.
When preparing your spending plan use the categories on the form to help you plan for fixed, variable and periodic expenses. Creating a spending plan will help you plan ahead.
If you stick to your spending plan you will only spend a portion of your income monthly and a portion of your income will be left for periodic and variable expenses. If you do not plan ahead you run the risk of living paycheck to paycheck and not having any money left over when you may need it most.
Here are some helpful hints:
- Average your net income and use the average on your spending plan. Your net income is the amount you take home after taxes and dedications. Here is how to calculate income for the spending plan. If you get paid every other week, multiply the net amount of your paycheck by 26 (the number of paychecks per year) and then divide by 12. If you get paid weekly, multiply your net paycheck amount by 52 then divide by 12. If you are a teacher or seasonal worker and do not get paid every month, multiply your net paycheck amount by the number of times you get paid for the year and then divide by 12. If you work on commission estimate what you average for the year and divide by 12.
- Use averages for all variable expenses. For example, take a years' worth of electric bills (if not available use a number between the highest and lowest costing months) divide by 12 and use that number in your spending plan. Using a monthly average in your spending plan will help you set aside money when the bill is lower for times when the bill can be higher such as the winter months.
- Calculate all expenses as monthly. For example, if you spend $500 each year on holiday gifts you will put $41.66 down for that expense on the spending plan. Since you do not buy holiday gifts each month after putting aside $41.66 each month it will be there when you are ready to buy gifts.
- Estimate periodic expenses, expenses that do not occur monthly. For example, although you most likely do not have car repairs each month, estimate an average year of car repair expenses and divide that number by 12. Enter your monthly expense. Use the categories listed on the spending plan form to estimate all the expenses that will most likely occur. Do not skip categories if you spend money on them during the year.
- Balance your plan. The form will do the calculations for you as long as you use monthly figures for income and living expenses. If your spending plan is not balanced, you will see it at the bottom of the form. It is important that you do balance. Ask yourself if there are areas that you can reduce expenses or increase income. You may need to reevaluate choices (big or small) to protect your future.