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Posted April 23, 2011 | comments Leave a comment

Developing a spending and savings plan

Many people have a negative feeling about the word "budget." The word brings to mind a straight jacket or perhaps chains -- something that holds you back or keeps you in check. But the purpose behind a budget is exactly the opposite. It is supposed to set you free to accomplish the things you want and to spend your money on the things that are important to you. So in Extension, we strive to use the phrase "spending and savings plan" instead of the word budget. This description is more accurate, suggesting that it is a plan for how you will spend and save your money. A spending and savings plan can help you establish financial control and direction, recognize spending patterns, and save money toward future goals.

To develop a spending and savings plan you first have to know what you make. Be sure to include all sources of income in your list, not just regular paychecks. Next, you have to know what you spend. To estimate your expenses, keep track of every penny you spend for at least 30 days (the longer the better). You will have some fixed expenses that are about the same each month, such as rent, utilities, and loan payments. You will have other expenses that can vary a great deal, such as groceries, clothing, and recreation. And you will have occasional expenses that only come a few times per year. Try to estimate a monthly amount for each expense category.

For the occasional expenses, you might want to use a reserve fund. Think through each month of the year and write down all of the expenses that typically come during that month. This can include birthdays, holidays, property taxes, insurance (once or twice a year), etc. Add up all of these expenses and divide by twelve. The result is the monthly amount you need to set aside to cover these expenses as they arise. This should become a category or line-item in your spending and savings plan.

You will also want to include a monthly amount to set aside toward each of your goals as a line-item in your plan. That way your goals are not a separate wish, but an integral part of your plan. Including your goals as a line-item increases the chance that you will actually accomplish them. Your plan should include a savings line-item as well, to set aside money for emergencies and future expenses you might not have planned for.

Finally, you'll need to subtract your estimated expenses from your income to discover the "bottom line." If it is a positive number, congratulations! Your plan will allow you to live within your means and still achieve the things that are important to you. If it is a negative number, you'll need to find a way to increase income and/or decrease expenses to make ends meet.

After you have followed your plan for a couple of weeks, you'll want to evaluate how well it is working. You may need to make adjustments by including expenses you forgot about or shifting expenses because the cash-flow isn't working. Please don't give up! Sticking with your plan for a few months will show you how great it feels to know where your money is going, make payments on time, and accomplish your goals.

If you would like to learn more about this topic, contact us for information about our free Managing Your Money series, which is offered continually in localities throughout the Northern Shenandoah Valley. Call me at 540-459-6140, e-mail me at kpoff@vt.edu, or call your local office of Virginia Cooperative Extension.


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