After sorting and analyzing your income and expenses, test your spending plan:
- Gather your pay stubs, financial aid documents, bills, bank statements, and any forms and statements you have with your income, saving, and expense totals.
- Total your income.
- Subtract your savings. Be realistic in deciding what you need to save for your emergency fund and goals, so that you can allocate yourself plenty of money for the three types of expenses (as described in the Expenses section).
- Now you know what’s left of your income after savings and what you can work with or afford for expenses. Begin with your fixed expenses when creating your spending plan (budget) which will provide a visual with how you can live within your means.
- Subtract your flexible expenses.
- This leaves you with what you’re working with each month for fun, or discretionary expenses.
- When you subtracted what you have been spending on discretionary expenses, was the result positive or negative?
If your budget comes out negative, don’t panic! Improvements are constantly made on every budget. Especially if this is your first time creating a budget, you may need to experiment on where you can make adjustments. Try reviewing each expense to make changes applicable to you, such as:
- Pack home-cooked breakfasts, lunches and dinners instead of buying your meals.
- Cancel your cable or Netflix/Hulu account.
- Stop buying things you don’t need.
- Reevaluate expenses such as cell phone plans, housing expenses, and transportation costs.
Instead of cutting down on your expenses, another option to consider (separate from or in combination with making cuts) is to brainstorm ways to bring in more income.
A spending diary really comes in handy to record each expense and pinpoint areas in which you could cut back. There are also several mobile applications and software (such as Mint or Toshl Finance) to help you keep track of your expenses and income. Keep track and direct your spending habits; try not to let your habits direct you!
Examples of immediate-, short- and mid-term goals:
- Saving for concert tickets
- Buying a new mobile device
- Saving for a weekend getaway
Some long-term goals that may be applicable to you:
- Repay student loans
- Buy a house
- Purchase a new car
- Start a business
- Travel/live abroad
Effects of small purchase decisions:
- Little expenses add up over time (Latte Factor)
- Saving on small expenses will lead to big savings
- Track your money for a month, or even a week, to see where you are losing dollars
Unless your income increases, be prepared with a strategy for where and how you might be able to shift spending when life changes. For example, if you’re wanting to save for a larger purchase such as a bike or TV, limit how often you eat out leading up to when you’d like to make that purchase. Long-term goals require a bigger commitment; “paying yourself first” usually works best: add each long-term goal as a category in your budget, or combine all of your long-term goals together so that you know your money is being saved towards them. If saving for retirement is one of your long-term goals, money should be automatically contributed from each paycheck into your employer’s retirement plan.
Sticking to a spending plan is difficult! The most effective methods for you will depend on what your money challenges are. Here are some tricks to help solve them and meet your personal goals and plans (remember to be honest with yourself!):
- I created a spending plan, but accidentally spent beyond it!
- Keep track of what you spend. Tally up your receipts on a regular basis, purchase everything with a debit card if you tend to lose paper receipts, or use a third-party service like www.mint.com.
- I make too many impulse purchases, even though I know I can’t afford all of them.
- Sometimes it’s more “painful” to spend money when you use cash as opposed to card. If plastic is too tempting, leave it at home and limit the amount of cash you bring with you to spend. Apply a “sleep-on-it” rule and wait at least 24 hours to make a purchase.
- I just don’t know where my money goes each month!
- The cash envelope system, although takes more discipline, helps many people avoid confusing their spending and savings goals. Decide how much you want to save and spend, write your intentions on separate envelopes, do the math so you know what amount goes in each envelope per paycheck, and stick to your envelope plan.
- I struggle whenever an emergency comes up.
- The trick with a super secret savings account (since it’s not actually a secret to you) is to make it difficult to access. Decide that you will spend only from your checking account. Then automatically direct money into your super secret savings account and forget about it until you reach your target goal.
Regardless of the method you use for your spending plan, nothing can be more important than having an emergency fund. You never know what life will throw at you: perhaps all in one day you lose a source of income, you get sick or injured, your car breaks down, and your pet needs emergency surgery. Unlikely, but having that emergency fund set aside will help the situation feel much less stressful.
A basic rule of thumb to start off with is to have three to six months of your fixed, flexible, and discretionary expenses set aside for times like these. If you can establish this as an immediate-term goal and attain it, you’ll be more financially prepared for these tough times.