A spending plan is a financial statement to help with money management. People usually have more wants than they can afford. A spending plan helps you make choices with your money to cover needs, save for the future, and enjoy some wants as well. It helps you track your income and expenses, meet financial goals, and live within your income.
Parts Of A Spending Plan
There are two parts in a spending plan: Income and Expenses.
Income is money you receive, and can come from earned wages/salary, tips, interest earned on savings, and monetary gifts.
Expenses are transactions where money is spent, and include categories such as food, housing, transportation, entertainment, insurance, and more depending on your lifestyle.
Getting Started
In order to create your own spending plan, you first need to make some decisions and gather some information.
Gather Information:
How much income did you receive last month? Use this information to forecast the income amounts for your spending plan.
What items did you spend money on last month, and how much? You’ll need this information to forecast your expenses for your spending plan.
Decide:
What will be the time frame of your spending plan? Most people plan their spending on a monthly basis, but you may want to break it down further and make a weekly or two-week spending plan. Choose whatever time frame best fits your situation.
How will you create and use your spending plan? You can go old-school and write it out using a pencil/pen and paper, or you can make a spreadsheet for it on a computer. You can even use an app on your smartphone for this purpose. We recommend keeping it simple by starting with paper and pencil – you can always switch to another method once you get the hang of it.
Choose your Expense categories. As a teen, your spending categories might be as simple as food and entertainment. As you get older and take on more responsibilities you’ll add categories such as housing, transportation, clothing, health/medical care, and more.
The Most Important Expense
The most important expense in your spending plan is when you are paying yourself first. The phrase Pay Yourself First (PYF) refers to putting money into savings (for emergencies, retirement, and other savings goals) before spending it on other things. This practice ensures that your prioritize your financial future over all other needs and wants. For this reason, your Savings category should always be the very first expense category in your spending plan.
Keeping Track
The next step is to keep track of everything you spend money on during your spending plan time frame. Update your spending plan every day by writing or entering the amounts of money you spent in your expense categories. This record keeping will help you know when you have spent your limit in a category of your spending plan.
Zero Gain Or Loss
Once you have established your Income and Expense categories and amounts, add up the totals. Subtracting your total expenses from your income determines if you have a net gain or a net loss. Your goal is to create a “zero-balance” spending plan that has neither a net gain or loss.
Net Gain – If the resulting number is positive, you have a net gain. That means you have more income than expenses and can add more money to savings or spend more in another expense category.
Net Loss – If the number you get is negative, that means you have a net loss and are planning to spend more money than you’ll receive. In this case, you’ll need to find a way to increase income, decrease expenses, or a combination of both.
The Key To Making A Spending Plan “Work”
A spending plan is a tool for money management – by itself it doesn’t “work” or “not work”. What makes it work is YOU. You must exercise self-discipline to spend only within the limits you’ve set for yourself. When you have reached the limit you set for a category, you must decide not to spend any more on that item for the remainder of the time frame. For instance, if your Food expense amount is $100 for a monthly spending plan and you spend $100 on food before the month is over, you must decide that you will not spend any more money on food until the month is over. You may decide to increase your food expense amount for the next month, but having the discipline to stick to your spending plan limits is the key to financial success.
Using a spending plan is a healthy habit that can help anyone establish financial stability and achieve long-term financial success. Helping your teen create and use a spending plan is one of the best ways prepare them for adult life.
Try This
Download instructions to an activity and our spreadsheet template to help teens understand the benefits of using a spending plan.
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The Center for Financial Empowerment is a 501c3 nonprofit organization whose mission is to empower disadvantaged youth through financial literacy education. Find out more about our work.
References:
Introduction To Spending Plans, Take Charge Today, November 2018