Steps 1 & 2 Steps 3 & 4 Steps 5 & 6 Steps 7 & 8 Steps 9 & 10 Quiz
Step 3: Create a Spending and Savings Plan

Once you take stock of what your current situation is, it is time to create a spending and savings plan. Your spending and savings plan should show where you want your money to go in the future. How much will you spend on clothing? How much will you set aside in your retirement fund? How much will you spend at the grocery store?

While you are creating your plan, keep in mind the golden rule of money management: your expenses (including the money going into savings) should never exceed your income. Start with the Cash Flow Worksheet. If you have a negative cash flow, you will need to make adjustments. You may still want to make adjustments even if you don’t have a negative cash flow. For example, you may want to put aside more money in savings than you are now (remember the figures you came up with in Step 1) or start sending your child to private school.

If needed, think about ways you can increase your income and/or reduce your expenses. Can you get a part-time job? Rent out a room in your house? Cut back on dining out? Skip the daily $4 mocha latte? Get a cheaper cable package or cut your land-line phone? Increasing income can be difficult, but most people have some expenses they can trim. Honestly assess what is a necessity and what isn’t. Use the Goal Per Month column in the Cash Flow Worksheet to list your spending and savings plan.

Your plan is only helpful if you follow it. Tracking your expenses on an ongoing basis will help you to see when you should stop spending because you have reached your limit in a particular category. You can use the Fritter Finder or a computer spreadsheet to track your expenses. There are also some computer budget programs that automatically track and categorize your debit and credit card purchases. If you overspend one month, try not to get discouraged. No one is perfect. If it happens often, you may need to readjust your plan so that it is more realistic. For example, perhaps you can’t keep your food costs at $150 a month, but you can cut back on your clothing purchases.

Step 4: Establish an Emergency Savings Fund

If you lost your job, would you be able to pay your bills for the next few months? If your car broke down, would you be able to pay for the repair without putting it on your credit card? Unexpected things happen, and for those living paycheck to paycheck, it can be hard to deal with them. They may find themselves skipping payments and risking utility shut-off, car repossession, and/or foreclosure or eviction from their home or charging things to credit cards, which only provides temporary relief. (After all, the credit cards need to be repaid.)

Establishing an emergency savings fund provides a cushion that allows you to pay for expenses should the unexpected occur. Financial experts recommend saving at least three to six months worth of essential living expenses. If you do not already have that amount in savings, determine how much you can set aside each month until you reach your goal. Since you don’t know when you will need the money, make sure that it is put in an account that is easily accessible and where there are no penalties for early withdrawal. A savings account is usually a good choice.

Saving is easier if you make it an automatic process. If you have direct deposit through work, you should be able to have a portion of your paycheck deposited into your savings account. Additionally, many financial institutions allow you to set up a periodic automatic transfer of funds from your checking account to your savings account.

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