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Developing a Spending Plan

What is a spending plan?

our spending plan is your active strategy for getting where you want to go. Think of your spending plan as a road map that helps you reach your goals. Your spending plan provides a sense of direction and puts you in charge of how your money is spent on a weekly, monthly, and yearly basis. What are the steps to develop a spending plan? It takes significant time and commitment to develop a spending plan that is right for you and your family. The steps are:

Step 1 : Record all your expenses In order to develop a spending plan that is appropriate for your lifestyle, you need to understand your own spending habits. First, start recording all your expenses every single rupee that you spend - for at least a month. You may record all your expenses in a notebook or use your computer. However you do it, it is important to remember that you include all expenses, no matter how trivial. You will find that just recording all your expenses may allow you to focus your attention on how, where, and how much money you are spending. Categorize it into heads like rent, food, clothing, transportation, any other expenses. These will include phone, mobile phones, unexpected household purchases, utilities maintainance, memberships, life and other insurances, entertainment, travel etc. After recording and prioritizing, take the following steps. Step 2 : Identify out-of-pattern expenses Once you have created categories and listed all your expenses for a month, your next step is to identify your out-of-pattern expenses. There are many expenses such as insurance payments, festival gifts, or taxes that occur annually, semiannually, or quarterly. Identify all of your out-of-pattern expenses. Add all your out-of-pattern expenses on a yearly basis and divide them into 12 so that you have a clear idea of how much you need on a monthly basis for your spending plan.

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Step 3 : Estimate your income If you are getting a regular salary, estimating your income is easy. Write down your monthly income minus income tax and any other automatic deductions. Add other income such as dividends, interest, and rent. Make sure you include all types of income. If your income is irregular, you will have to start with the premise that your total income is somewhat predictable, but your payments come at uneven intervals. Look at your income over the last two years and project your income for the next 12 months. Divide that number by 12 and consider that to be your monthly income. Plan your spending with that income in mind. During months that you earn more than average, save the extra earnings for the months when you earn less. Step 4 : Develop your plan Now you are ready to create a spending plan based on your income and your expenses. Here are some guidelines that experts suggest. Suggested spending plan percentages of your gross income:

Look at your records and see how your spending is distributed in terms of percentage of your income. You can see how your own spending habits compare with the guidelines above. You may choose to follow these guidelines closely, or you may decide to make changes so that the overall spending plan reflects your lifestyle. For example, if you love to travel, your transportation budget may be larger than the suggested average. To compensate for that extra spending, you will have to reduce some of your other expense categories. Also, keep your goals and priorities in mind and adjust your spending plan accordingly. For instance, if you are not saving any money right now but you want to save 10 percent of your income for retirement, find out from which categories the money will come. Implementing and Monitoring Your Spending Plan: Once you have identified your budget goals and created a spending plan to meet them, you are ready to put your plan into action. Before you begin, though, here are some tips to avoid common mistakes.

Tips to Implement and Monitor your Spending Plan

Involve the entire family. Implementing and monitoring your budget plan requires commitment as well as discipline from the entire family. Make sure that they are all in agreement and understand your plan. The better you all work as a team, the greater the chances for success. Be disciplined. To get long-term benefits, your budget should become a way of life. Jot down all the expenses, item by item, day by day, in your diary. If you are using your computer, make sure you enter all the expenses at

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the end of the day or at the end of the week. Dont wait until the end of the month because, by then, you will have so many entries that you are likely to give up. Keep it simple. Keep monitoring simple. Divide your expenses into fixed, variable, and discretionary categories. Monitor your variable and discretionary expenses, such as clothing money or eating out, once you have assigned your fixed expenses. Use different credit cards. Track different categories by using different credit cards. Dedicate one credit card for clothing purchases so that you dont need to write down your expenses every time you buy any clothes. Instead, your credit card statements will itemize your clothing expenses for you. Use an oil company card when you fill up your cars fuel tank. Caution If youre going to use multiple credit cards to help track your expenses, make sure that you arent paying high annual fees for each of these cards. Be careful not to fall into the trap of using credit to pay for everyday expenses and not paying off your outstanding balance each month. If you do this, it will seem like you are spending less, but your debt will continue to increase. Fine tune as you go. Keep in mind that implementing a spending plan requires fine tuning of your estimates and your expenses as you go along. You will get better as time progresses. Dont give up too quickly if you feel it is not working.

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Exercise
1. Nishant had joined TCS on the 1st of July07. He had come to Bombay from Nagpur. In the first month, he took a vehicle loan, so that his commute is faster and convenient. He had to allocate Rs. 6000pm for this outflow. Initially, during the first few days, he had to spend Rs. 15000 from his pocket for stay and food expenses until he rented a place and made arrangements for food. He made clothing purchases for Rs. 6000, just before he joined his organization. The petrol costs were amounting to Rs.1000pm. His mobile monthly expense came to Rs.2000pm. He spent Rs. 2000 initially on gifts and entertainment. His monthly expenses for food and rent were up to Rs.12000pm. He wanted to plan to save money for his sisters college education, as soon as possible. His monthly salary was Rs. 25000pm. The corpus required for education was Rs. 2 Lakhs. Record Nishants expenses and develop a plan to save money for his goals.

Chapter Review

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