22 Oct Your Spending Plan Simplified
What is the first thing anyone tells you when you talk about starting a life on your own, getting a new job, or pretty much anything involving a change in your financial situation?
“Make sure you have a spending plan.”
These are more than just words, whether you find them encouraging or not. A spending plan is basically a plan, and without a plan, life is more chaotic. Think about it. If you don’t have a plan for your money, your income and expenditures, chances are good that you will run out of money before you have realized it. That would lead to many problems, possibly including a need to revamp your life.
So, if you are pleased (or pleased enough) with your current living situation, you will need to do what you can to maintain it. And that means you will need to create and live within a budget. However, setting one up is probably easier than you think.
What Are Your Goals?
If you are just starting out on your own, you might not think you have any financial goals other than surviving paycheck to paycheck. In fact, the younger your financial career is, the more likely you are to have a few simple goals. You just may not have thought of them before. A change in living space? Maybe you aren’t fond of your little apartment in the city and want to save for a house in the suburbs. Goal! A wedding in your future? Goal! Summer vacations? Goal! These are what you have in mind when you put away savings.
How Much Do You Have?
Hopefully, you will be starting off with at least a little next egg. (If you don’t, it’s okay. It just might take a little longer to reach your goals.) Your best bet is to keep this as an emergency fund and put it away in a high earning investment or account. Do not include it as part of your income.
How Much Do You Make?
Next, figure out how much you have to work with. As you record your monthly earnings, remember to use your net salary and not gross. To determine your monthly salary, divide your annual salary by twelve, or multiply your twice-monthly check by two, and so forth. Check your paystub to see how much is taken out for taxes, retirement, etc. (If you aren’t sure, a good bet is that about 1/3 of your income with go toward taxes.) If your income is flexible or based on commission, you should try to find an average. Keep in mind that some months will be lean, and some will be heftier. As long as you keep within your budget and don’t overspend in the times of feast, you will be fine during the times of famine.
How Much Do You Need to Spend?
The key word here is “need.” Calculate the cost of your basic living needs: rent or mortgage, utilities, food, transportation, clothing, etc. Remember, the idea is to average out your needs throughout the year. You may only need to buy clothing at certain times of the year, but divide out your total yearly expense by twelve to put in a monthly spending plan. If you have a bill that you only pay once a quarter, divide that amount by three in your spending plan. Ideally, this amount will not exceed 50% of your income.
How Much Do You Want to Save? (and Spend?)
The idea is to put at least 20% of your income away for savings each month. If you find that hard to do, re-examine your goals. If you really can’t stand living in the apartment you are in, you may find it easier to stash away a greater amount towards a down payment on a house. Once you have found the necessary amounts your will be spending and saving each month, you should find about 30% of your income left to spend on the things you want. Don’t ignore these categories! Buying gifts for people and going out for dinner or entertainment once in a while make life worth living as you go.
Track Your Expenses
Once you have a budget, you aren’t done. You need to make sure you stay within its parameters. Record your expenses as they come in and track it against your income to make sure you aren’t overspending. Your data can be recorded in any of a number of apps to keep you on track.
You may well have been planning your spending all this time without recording your actual expenditures. Keeping track of your money – earnings, savings, and spending – will not only help you stay on track, but encourage you to keep up the good work, getting you to your goals even faster.
As always, an experienced financial advisor can help you make sense of your goals and expenses. Take a look at our spending plan, and then give us a call to start taking big steps toward financial freedom.