Establishing a Spending Plan: Step Four to Fixing Family Financial Problems

As the name describes, a spending plan (often called a budget) is simply a plan that you and your spouse devise together for how you want to spend your money.  It enables you to make informed decisions regarding where your money goes instead of continually reacting to financial difficulties.  A spending plan helps you make the most of your money and maximize your surplus - the money you have left after all your financial obligations are met.  Make your money work for you!

There are several steps to fixing family financial problems including: tracking spending, organizing spending, and analyzing spending.  [See links to previous articles at the bottom of this post.]  If you have done this you are now ready establish your spending plan.  The good news is that the the most time consuming work is already complete.  All that remains for this step is for you and your spouse to decide how much money you will begin to spend monthly in each spending category. 

Depending on what you learned from tracking, organizing, and analyzing your spending, some tough decisions may be in order.  If you currently have a very slim surplus each month or find yourself operating in a deficit something must be done.  Here are some things to consider when establishing your spending plan.

(1)  If your housing, auto, and food spending together total more than 70% of your net spendable income it will be impossible to maintain a balanced budget.  While you should not make any rash decisions that will cost you more money in the long run, it may be time to explore options to reduce spending in these areas.  Depending on the severity of your financial problems there are many long-term possibilities including finding housing options more within your means or selling a vehicle to eliminate a monthly payment.  Since these options take some time to arrange they will not immediately fix your budget crisis.  So you must find other ways to reduce spending in the short term.

(2)  Consumer debt is a major cause of financial problems.  Consumer debt is usually defined as debt owed to credit cards, department stores, personal loans, and other forms of credit.  Generally a mortgage and car loan are not considered consumer debt.  If consumer debt is contributing to your budgeting problems you must take immediate action.  First, stop using credit cards and other forms of consumer debt.  Continuing to do so will only exasperate the problem.  Cut up all credit cards and close all accounts to eliminate the possibility of future use.

A significant problem with credit cards is the exorbitant interest rates that are charged.  You will need to educate yourself regarding ways of consolidating debt and/or reducing interest rates so that you can begin the process of paying down the debt.  Be very careful!  There are many companies and individuals who offer services to "help you get out of debt" that really only take advantage of people and cause them to lose more money.  Also, consolidation loans and credit card balance transfers are advantageous in some cases and bad news in others.  Make very sure you completely understand all of the terms before utilizing such options.

(3)  Small savings add up.  Finding and eliminating relatively small amounts of unnecessary spending in several categories may add up to a significant amount.  Specifically, these spending categories often represent opportunities to save: entertainment/recreation, clothing, and miscellaneous.  Eliminating waste in the form of habitual purchasing of unneeded items can save hundreds or more a month.  Finding more inexpensive, or even free, ways to have fun may go a long way.  Minor lifestyle changes (i.e. taking a lunch to work versus eating out, making coffee at home versus daily visits to a coffee shop) will also help your bottom line significantly.  Your tracking and analysis done in previous steps will expose opportunities to reduce spending in these areas.  As you explore all of these options, don't fall into the trap of working hard to save money in some areas only to blow it in other ways.

Articles in this series...

--- Introduction
(1) Track all spending daily for a month
(2) Organize spending into meaningful categories
(3) Analyze your spending
(4) Establish a spending plan (budget)
(5) Work your plan
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