Developing a Spending Plan

© Family Economics & Financial Education – May 2005 – Spending Plan Unit – Developing a Spending PlanFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Developing a Spending Plan

Family Economics and Financial Education

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Introduction Spending Plans Income and Expense Fixed & Flexible Expenses Net Loss & Gain Spending Plan Process

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Spending Plan Financial Statement

Assists in money management Estimate of income and expense over

time Important positive uses:

Understanding where money is going Tracking income and expense Helps to meet financial goals Helps people live within their income Reduces the need for using credit

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Income & Expense Spending Plans have two main

components Income

Money Earned Expense

Money Spent Fixed Expenses Flexible Expenses

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Income

Income is money earned from: Tips Wages or salaries Withdrawal of money from savings Interest from savings accounts, or

investments Monetary gifts Scholarships

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Expense Money Spent Fixed Expenses

Same amount paid each time, usually has a specific due date

Rent/Mortgage Difficult to change in short amount of time

Flexible Expenses Different amount paid each time, usually no specific due date

Clothing Easier to change in short amount of time

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Net Loss & Gain When finished with the spending plan two

outcomes are possible: Net Loss

More expenses than income An individual needs to increase income or

decrease spending Net Gain

More income than expenses Ideal situation Extra money can go into savings, be invested, or

spent

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Spending Plan Process Six steps in the spending plan

process1. Set Financial Goals2. Organize3. Decide4. Implement5. Control6. Evaluate

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Step 1:Set Financial Goals Financial Goals should be:

Specific: exactly what is to be done with the money;

Measurable: write the exact dollar amount; Attainable: how will the goal be reached -

determined by budget; Realistic: Do not set the goal for something

unattainable or unrealistic; Time Bound: specifically state when the

goal needs to be reached.

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An example of a Financial Goal

To save $5,000 for a car down payment, I have to deposit $208 into my savings account each paycheck for 2 years.

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Step 2:Organize Determine the appropriate way of

record keeping Select categories for the spending

plan Select a time period

Usually when paychecks are received Weekly Bi-weekly Monthly

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Step 3:Decide Make realistic decisions and

estimates for categories If expenses exceed income,

Earn more income Decrease expenses A combination of both

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Step 4:Implement Put spending plan into effect Keep accurate records of all income

and expense Income is usually constant

Keeping track of expenses is the most important!

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Step 5:Control Control systems are ways that a person

can keep accurate records of spending Realize potential problems early if

spending too much in one area Control systems occur simultaneously

with implementation A person should keep a credit

spreadsheet which logs all credit transactions (charges and payments for each creditor)

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Types of Control Systems Envelope System

Individuals place actual budgeted cash in a labeled envelope for a certain expense

Each time $ is taken out of an envelope, write down amount and place receipt inside

Move money around to meet expenses Once cash is gone, its gone and there is

no more money in that category

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Types of Control Systems Spending Plan System

Track expenses on a sheet by entering amount

Keep daily to know how much is being spent

Check Register System Tracks all expenditures in a checkbook

register Divided into spending plan categories

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Step 6:Evaluate Determine if previous steps in spending

plan process have worked Compare estimated amounts to actual

amounts Have goals been met?

Were there major balances or deficits? Make necessary changes to spending plan

A continual process because financial situation is always changing!

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THE END!

Developing a Spending Plan

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