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Building a Great Spending Plan

A lot of people groan at the idea of budgeting and tracking every little expense and always second guessing even the simplest purchase. Building a spending plan is about more than that, though. It’s about creating a strategy that covers how you save and how you spend money. A good spending plan is the first step toward meeting your larger financial goals, and it doesn’t have to be as painful of a process as many people think.
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A spending plan is more than just another word for a budget. Yes, it requires some budgeting, but it can be a great tool for helping you identify your available resources, spend and save more effectively, and develop more confidence and independence with your own finances.

Getting Started
Many of us have been in a position where we just don’t know what happened to all the money we expected to have. The end of the month rolls around and we’re scraping to find the finances we need to get by. A spending plan will help you keep track of your finances and develop good spending habits by planning ahead and understanding more about your expenses.

Give yourself plenty of time to prepare your plan, and consider making a new one every month. You don’t need to try and force a single plan into your financial situation because every month is different. Don’t be afraid to make modifications either, when circumstances begin to change.

Building the Plan
There are three basic steps to a good spending plan. First, determine your income. Next, estimate your expenses (all of your expenses), and then adjust your spending to match the available finances.

Determining your income should be the easiest step, and for this plan we’re only interested in the amount of take-home income every month. If you have income from more than one source you can list it all, but only if it is guaranteed on a regular basis. You can’t depend on “possible repayments” or “likely dividends” in your spending plan.

Expenses, on the other hand, may take a little extra work to make sure you include them all. Most expenses can be divided into three categories: fixed, flexible (controllable), and periodic. Fixed expenses are those that have to be paid no matter what – rent, utilities, loan payments, etc. Flexible expenses are things that may be necessary, but could also be reduced or eliminated if necessary, like entertainment, eating out, clothes, travel and other similar things. Finally, periodic expenses are those that come up on an annual basis, that have to be paid but aren’t always an immediate concern. This could include licensing fees, retirement contributions, and other payments.

It’s important to understand the differences in expenses because when you get to the next step, adjusting your spending, it will be much easier to know what you can cut and what has to stay.

Just remember that a spending plan isn’t only about saving money. It’s about spending money responsibly and making sure you have enough to cover your expenses. Once you’ve determined the difference between monthly income and monthly spend, you can begin to modify your habits to create a buffer so that when the unexpected happens, you won’t get caught unprepared.

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