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“What the hell happened?”
I have frequently asked myself this question in two situations… when I look at the old dude in the mirror, and when I see my bank account balance. Unfortunately, despite my shock, neither one lies.
If you are ever caught wondering where your money has gone, you need a spending plan.
A spending plan helps you keep track of how much money is coming in, shows where you are spending, and identifies potential areas to save. Your plan is not a set of rigid rules to live by, but more of a guideline to help you manage your money.
Spending plans are not complicated and don't require a lot of time to complete.
Follow these five simple steps and download our Free Spending Plan Worksheet to set up your spending plan in 30 minutes or less. 
DOWNLOAD YOUR FREE SPENDING PLAN WORKSHEET HERE
In all fairness, the 30 minutes or less is similar to cooking a meal in 30 minutes. You should have all the ingredients available before starting. The ingredients for creating your spending plan are all your financial statements. Access to your bank statements, paystubs, credit card statements, and check register will prepare you to cook up your plan.
Step 1: Identify Your Income
Your income is all the money you have coming in. Income is like oxygen, you need to constantly bring it in so that you can take action. Without income, your spending plan has as much power as your body without oxygen.
List out all your sources of after-tax income. You can find this information on pay stubs, bank statements, or other records. If the income you receive is variable, create a monthly estimate by dividing the yearly amount by 12.
Here are some common sources of income:
- Salary
- Salary of spouse or significant other
- Self-employment income
- Social Security
- Child support
- Spousal support
- Financial aid
- Rental income
Estimated time to complete: 3 minutes
Step 2: Record Your Expenses
In the first step of your spending plan, you listed your income. Now list your expenses.
Everything you spend money on should be on your expense list. To gather this information examine your bank statements, credit card statements, check register, receipts, and anything else that shows what you paid.
Estimate your expenses as quickly and accurately as possible. Don't overthink or overanalyze this step. You will never be 100 percent accurate. If you don't have the information, use your best guess and move on. Later you can adjust your plan with better data.
If you use cash or don't have specific details, then use a “cash” or “other” expense category as a catch-all for now. Then record your cash expenditures in the future to get better information.
I find it easiest if you separate your expense list into 3 sections:
- Fixed or recurring monthly expenses
- Variable monthly expenses
- Variable expenses that don't occur monthly
Fixed or recurring monthly expenses
These are the expenses that occur every month and are usually fixed in nature. Examples include:
- Rent or mortgage
- Insurance: health, life, auto, homeowners, etc (If these are not monthly, figure out the annual amount and divide by 12 to make it a monthly amount)
- Car payment
- Utilities (Utilities can vary by month or season, so use an estimated average)
- Cell phone
- Cable/Internet/Phone
- Tuition/Education
- Childcare
- Debt payments (If you carry a balance, only record minimum payments plus any extra you pay regularly. Do not include debt payments if you pay off the entire balance every month.)
- Savings/Investments (List any after-tax savings or investments. While it seems weird to have these in the expense list, they are regular outgoing cash flow.)
Variable monthly expenses
What do you spend money on every month that is not fixed? To make your spending plan as accurate as possible, estimate these common monthly expenses using your actual spending from the last 3-6 months. Examples include:
- Groceries
- Eating out
- Entertainment
- Gas
Variable expenses that don't occur monthly
The most difficult to forecast category of expenses are those that don't occur regularly. Infrequent expenses are often overlooked and throw off the accuracy of your spending plan. Again, don't over analyze the information. Make your best estimate knowing that you may have to adjust the information later. Examples of expenses that don't occur monthly are:
- Clothing
- Healthcare costs (not including insurance premiums)
- Auto maintenance
- Home repairs
- Gifts (holiday and birthday gifts)
- Vacations
Estimated time to complete: 18 minutes (Seriously, estimate and adjust later. Complete this part of your spending plan quickly and don't over think it.)
Step 3: Simple Math – Compare Your Income and Expenses
Time to do some simple math.
Take your total monthly income from step 1 and then subtract your total monthly expenses from step 2.
Total Monthly Income – Total Month Expenses = ???
What did you get?
If the number is positive, that's great. A positive number means that your income is greater than your monthly expenses. Use your spending plan to see if you can put more into savings or cut any excessive spending.
If your number is negative, that's not so good. A negative number means that your monthly expenses are greater than your monthly income. Typically negative numbers will reflect increasing debt or shrinking savings accounts. The good news is that you can improve your situation by creating your spending plan.
Estimated time to complete: Less than 1 minute
If you haven't already, get your Free Spending Plan Worksheet
Step 4: Create Your Spending Plan
Now that you know how much money you earn and spend in a month, you can start to take control of your money.
Take control of your money by assessing your expense list, look for areas to reduce spending, consider ways to increase your income, and track your progress.
Assess your expense list – “I spent how much money on that?!?”
Ask yourself if you are currently spending money where you want to? Were there any surprises in your expense list? Are you wasting money?
When my wife and I created our spending plan our eating out total was way more than we expected. Basically, we were eating our money. By realizing that we were overspending on eating out we became purposeful with cooking so that we could allocate those funds to areas we valued more, like vacations.
Look for areas to reduce costs in your spending plan – “Do I really need that?”
Are there any areas that you want to cut back on? Some ideas include:
- Cooking instead of eating out
- Making coffee at home (Starbucks is not cheap)
- Reducing entertainment costs by hiking or going to concerts in the park
- Carpooling to save money on gas and car maintenance
- Downsizing your car or home
- Cutting cable or getting rid of your home phone
There are many different ways to save money. What is important to remember is that this is specific to you. Your spending plan is your purpose and values for your money. If your current expense list doesn't match your values, change it.
Another way to reduce spending is to use Trim. Trim is a virtual personal assistant that constantly works to save money. Trim adds value by canceling old subscriptions, getting refunds on price drops, and negotiating credits on your cable bill. Best of all, it's free!
Consider ways to increase your income – “Woah, I need more money.”
Sometimes you go through your spending plan and there is nowhere else to save. You have already made cuts as deep as you can. Or you have items that you really value but can't afford given your current income. The solution is easy, increase your income.
Ok, maybe that isn't easy, but it is a solution. For some ideas, check out 50+ Ways to Make More Money.
Track your progress – “I saved a lot of money this month. I killed it!”
Track your actual expenses to see how you are doing. Keep a monthly log and compare it to your estimates. Give high-fives when you succeed.
The best way to track your progress… you guessed it, download our Free Spending Plan Worksheet.
Estimated time to complete: 5 minutes (You should know quickly if there is an expense that seems high and can be reduced.)
Congratulations, you have a spending plan.
Step 5: Adjust Your Spending Plan
Now, I'm going to lay some truth on you… within a very short time, your spending plan will be wrong.
Expenses will be different than you estimated. Inflation means that costs will increase. Your life situation will change.
There are too many variables and too much guesswork for spending plans to be 100% accurate.
You will need to adjust your plan regularly. I recommend reviewing your plan monthly and upon any major life changes.
The value of your spending plan is that it gives you control of where you want to spend. No longer will you wonder where it all went.
You will know exactly where it went. You will know exactly what the hell happened. It happened just like you planned.
