For those graduating college this month, before you lay unlimited possibilities. Your future is whatever you make of it. Many of you will be moving out on your own with your first “real” job. While this is a time filled with excitement, it is also filled with uncertainty. How are you going to pay for everything (including your student loans)? Luckily, there is a tool to help you. Most call it a budget. I call it a spending plan. I like a spending plan because it is a guide to help you achieve your goals. A budget on the other hand sounds like a restriction and implies negativity.
What is a Spending Plan?
As I mentioned above, a spending plan is a guide to help you realize your dreams and goals. It provides you with a sense of direction and in time, a look into the past and where you came from.
How to Create a Spending Plan
There are four key steps in developing your spending plan, which I highlight below. Note that the numbers presented below are simply guidelines. Everyone’s situation is different, so tailor your spending plan to fit you. If it does, you will be more likely to follow it.
Step 1: Create a Spending Diary
In order to create your plan, you need to know where your money is going. To do this, you need to record you spending habits for at least a month. You can use whatever method you want – electronic or pad and paper – just make it a point to write down every penny you spend, the date, where you spent it and then assign it a category.
Most people will have a few main categories, such as housing, food, clothing, transportation, bills, etc. Below that will be sub-categories. For example, under the food category, you would have sub-categories of groceries and dining out.
It’s important to create as many sub-categories as you need. You don’t want to get into the mistake that many others (including me) have made with the miscellaneous category. Before you know it, you will have spent $300 last month in miscellaneous. You’ll have no idea where that money is going.
Another important point is to make note of any special expenses. These include annual or semi-annual insurance payments, taxes on your house, gifts, etc. The best way to account and plan for these is to sum up the amount for each one and divide by 12. Then you can save that amount on a monthly basis. When the bill comes due, you have the money for it and it doesn’t catch you by surprise.
Step 2: Estimate Your Income
Depending on how you are paid, this part could be easy or more time consuming. If you are paid a salary, take the amount you are paid less taxes (your net income) and total it for the month.
- If you are paid weekly, simply take the weekly amount and multiply by 4.3.
- If you are paid bi-weekly, take you paycheck and multiply by 2.16.
- If you are paid semi-monthly, take your paycheck and multiply by 2.
If your income is variable, you will need to look at past paychecks to get an estimate of your monthly income. If you do not have past paychecks to rely on, then make your best estimate for now, and revise as you get paid so you can calculate an average amount.
Step 3: Develop Your Plan
Now that you have your income and expense figured out, you can create your plan. Experts suggest the following guidelines for spending in each category:
Now look at your spending and see how you compare. Realize that you can choose to follow these guidelines or you can create your own. These are just to give you an idea of how much you should be spending in each category. If you like to travel, then you can spend more on travel. Don’t feel as though you have to fit in to these percentages.
Final Tips for Your Spending Plan
- People don’t change overnight, so don’t create a spending plan that doesn’t fit you. If you do, you will most likely give up on it after a few short weeks or months. Make small changes over time.
- Your spending plan is flexible. Things happen. Don’t look at your plan as set in stone. Tweak it as you go along so that it fits you.
- When you are first starting out, keep it simple. The easier it is to follow, the more likely you will do so. As you progress, you can add layers to it.
- Don’t account for every penny. Have a fun category that allows you to spend money however you feel like it. But keep this amount reasonable.
- If you are going to modify the guidelines above, try your best to keep the savings category amount as high as possible. The more you save, the more you can invest. The earlier you start to save, the more your money can compound upon itself. All of this leads to you retiring when you want.
Have you had success with a spending plan?