How To Develop A Spending Plan

So what is a spending plan? I prefer the term “spending plan” over budget even though they’re really both the same thing. Budgets make many people think that they’re of scarcity and deprivation. Spending plan, on the other hand, evokes an image of being in control and living your life the way you choose.

Before attempting to develop a spending plan, you need to figure out what you’re spending money on. After doing that, make sure you know what you actually owe. Finally, you need to figure out how much you spend on your other “necessities”.

Make A List Of Your Income and Expenses

It should be fairly easy to calculate your income. Just look at your last paycheck! For the purposes of developing a spending plan, all you need to worry about right now is your net paycheck.

You should be able to determine your ongoing expenses by looking at the list of things you’re currently spending money on. In addition to that, you should add expenses that you only have a couple of times a year (for instance, if you pay car insurance every 6 months, you should add 1/6th of your car insurance bill to your monthly total).

As you’re compiling the list, mark each item as being either mandatory or discretionary. Note that a single item could be partially both. For example, food is obviously a mandatory expense, lobster every night is obviously discretionary. The minimum payments on your debt are mandatory, any extra principal payments are discretionary.

Don’t Forget About Savings

Make sure to include your planned savings on the list. It you know you need to build an emergency fund of $1200 over the next year, add $100 to your monthly expenses — and mark it as a mandatory expense!

It might be a good idea to list any other savings you’d like to do here, too, but you should probably consider these other savings as discretionary, at least until you’ve covered your mandatory expenses.

Now For The Plan

If your mandatory expenses are less than your income, you can start choosing your discretionary expenses that you’d like to include in your plan. If, however, your mandatory expenses are higher than your income, you either need to look into cutting back your expenses (is that unlimited texting plan really mandatory?), or you need to look into alternate means of getting income, such as a second job.

When you’re planning your discretionary expenses, you should should consider using the debt snowball to decide which debts to pay first.

Wrapping Up

Developing a spending plan is not difficult, but it does require that you’re honest with yourself. Make sure you know what your debt elimination goal is. And come tell us about it in the get me out of debt forum!

Tags: budget, debt elimination goal, debt snowball, develop a spending plan, discretionary expense, get me out of debt forum, mandatory expense, spending plan

This entry was posted on September 2, 2011 at 8:54 pm and is filed under Debt Elimination, Getting Out Of Debt. You can follow any responses to this entry through the RSS 2.0 feed.