Spending Plans: The New Budget

suitcase-of-moneyIt’s important to understand that we are talking about a plan to spend your money. This should feel different than thinking about money in terms of a budget. Mentally, it makes a difference!

So consider a spending plan the new budgeting philosophy! By changing the wording, your spending can take on a sense of direction as opposed to feeling like your money just got sent to jail.

expense chart

  • Income is considered money you earn from work and other sources.
  • Savings is money set aside for immediate-term goals or emergencies, as well as short-term, mid-term, and long-term goals.
  • Expenses are the things you spend money on. There are three categories of expenses: fixed, flexible, and discretionary.

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Income Defined

What is income? Income includes things such as salary or wages, tips, veterans benefits, investment income, child or alimony support, gifts, and annually, scholarships, grants, and student loans.

To calculate your income for a spending plan, add all of your sources together.

Remember, student loans, grants, and scholarships often come in lump sums at the beginning of the school term. When determining your income for a spending plan, make sure to divide those amounts over the number of months you’ll be expected to use them.

Savings Defined

What is savings? Saving is allocating money to reach and attain your goals.

It is helpful to de ne your savings goals in terms of time when creating a spending plan. You don’t need any money to establish your goals; you simply need to consider your savings goals as a component of your spending plan.

At minimum, a spending plan goal should be to establish an emergency fund. Consider the timing of immediate-, short-, mid-, or long-term goals.

Define and Design Your Spending Plan

A spending plan involves three types of expenses: fixed, flexible, and discretionary.

Fixed expenses don’t change from month to month and include expenses that are required for survival, such as shelter, emergency funds, necessary transportation expenses, health related expenses, and any child or dependent care.

Flexible expenses vary each month but are also essential for survival, such as meals and snacks, personal necessities, transportation repair and maintenance, and utilities.

Discretionary expenses vary each month but are generally non-essential or cost more than necessary.

Let’s face it, discretionary equals all the extras, or the fun! This includes dining out with friends, paying for TV, traveling for spring break, buying expensive name brand items, and gifts for events like birthdays and weddings.

You must be willing and able to keep close tabs on this category of expenses and modify if needed when you choose to work your spending plan.

You can modify other categories too. For example you can modify your
fixed housing expenses by choosing to live with roommates, taking the bus or train instead of driving your car, or choosing a less expensive cell phone plan. These can have a significant impact on your bottom line but modifying the discretionary expenses is an easy first place to look when making adjustments to your spending.

financial information chart

Test your spending plan by following these steps:

Pull together 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.

Next, subtract your savings. Decide what you need to save for your emergency fund rst, then any immediate-, short-, mid-, and long-term goals next. Be realistic so you can allocate yourself plenty of money for the three types of expenses.

Once you determine what’s left of your income after savings, you now know what you can work with or afford for expenses. This means that a spending plan can help show you how to live within your means! So, begin with your xed expenses.

Then subtract your exible expenses.

Now you can see 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?

financial goals

With all of this in mind, 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 really want to participate in a weekend getaway with your friends and you normally budget for eating out four times a month, you could eliminate a few restaurant trips for a few months to cover the cost of the weekend trip.

Unfortunately, this strategy doesn’t work as well for long-term goals. You really need to make a commitment to saving for long-term goals. And what usually works the best is to “pay yourself rst.” Add each long-term goal as a category in your budget, or lump all of your long-term goals together so that you know your money is being saved toward them.

If saving for retirement is one of your long-term goals, you should automatically contribute money from each of your paychecks into your employer’s retirement plan. And if your employer offers a matching contribution to your retirement plan, then you should contribute whatever your employer is willing to match because that’s free money.