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Creating Your Spending Plan

http://www.cambridge-credit.org -- Its often been said that you cant tell where youre going unless you know where youve been. This is certainly true in the development of a Spending Plan. You have to have a clear picture of your current situation before you can decide on a reasonable course of action. Watch this week's webisode from Cambridge Credit Counseling Corp. to learn more. Host: Community Outreach Director, Thomas J. Fox. Transcription: Hello, and welcome to Your Money 2.0. I’m Thomas Fox, Community Outreach Director of Cambridge Credit Counseling. It’s often been said that you can’t tell where you’re going unless you know where you’ve been. This is certainly true in the development of a Spending Plan. You have to have a clear picture of your current situation before you can decide on a reasonable course of action. This is accomplished by conducting an Initial Spending Assessment, which will give you an overview of the costs associated with your current lifestyle. Because our finances are unique to ourselves, it may be difficult to say that someone else’s spending is inappropriate in any particular budget category; however, there are some recommendations we can make. By establishing spending guidelines for each category of the budget, we may be able to quickly identify an area of the budget that is commanding too much of your income. With this information in hand, you can begin to make immediate changes, applying your earnings to other areas of the plan that require them. In order to create an accurate representation of your expenses, you should gather all your bills; including credit card statements, receipts for groceries, gas, or anything else that you buy with cash. To review additional expenses, it’s also helpful to have your checkbook available. If you’re creating a Spending Plan for the first time and haven’t maintained accurate records, don’t worry. “Best guess” estimates are okay. The goal of conducting an Initial Spending Assessment is simply to gain a sense of your current spending habits, not to create your final budget. That comes later. Spending generally falls within six categories. Cambridge recommends that each category require only a certain percentage of your monthly income. Let’s take a moment to review each of these categories. We recommend that the “Home” category should require no more than 40% of your earnings in any month. This would include items such as rent or mortgage payments, insurances associated with housing, your utility bills, payment for household furnishings, as well as the cost of cleaning and maintenance products. The category we call “Life” should occupy no more than 17% of your income, and would include common living expenses. For example, in this category you would account for expenses such as clothing, childcare, fast food, groceries, computer downloads, subscriptions and other entertainment items. The “Debt” category should require no more than 12% of your monthly take-home pay, and would include credit cards as well as any other loans. Paying more than the minimums due on all accounts is strongly recommended here. The “Other” section of your budget is essentially a catchall, containing everyday expenses totaling no more than 6%. Expenses accounted for in this section can include tobacco, personal care products, and just about anything else that doesn’t fit into other categories of your plan. One of the more important aspects of developing a Spending Plan is to dedicate some of your earnings every month to savings. The savings rate in the United States is on the rise from a dismal -2.7%, but it’s still far short of the recommended 10%. Try to put as much money as you can in this category and remember that there are several funds you need to establish within this section. You need an emergency fund equal to 8-10 months worth of expenses. You need a fund equal to the deductibles on your insurance policies. When those are satisfied, you’ll need to allocate some money to investments – the list goes on. This should be a very active area of your budget. Finally, the Travel section of your budget should require no more than 15% of your earnings. This category relates to all the costs associated with your automobile and/or public transportation expenses, including tolls, registration, maintenance, parking fees and tickets, bus or subway passes, etc. At the conclusion of this assessment individuals commonly find that their spending doesn’t match the recommended parameters. That’s fine for now! Remember, the point was to know where you are so a plan can be developed to get you where you want to go. In an upcoming edition of this series we’ll look at how to rein in overspending in specific budget categories.