Step 5 – Managing Your Spending Plan

Although family members use their income and make financial decisions jointly, it is generally more efficient if one person assumes the routine responsibility of money management: paying bills, balancing the checkbook, handling money and keeping records. The individual with more knowledge and skills for this task should be the main money manager. Adult family members may want to alternate the money management routine periodically. This is an opportunity to appreciate the rewards, and sometimes hassles, of the responsibility.

Set up a money management center to keep all records and supplies in one place. Include these important materials:

• Spending plan and past spending records
• Bills and receipts
• Checkbook, bank statements and canceled checks
• Charge slips, charge account and bank card statements
• Savings account records
• Income records such as paycheck stubs, Social Security records and pension receipts

Summary

Getting the most from your income requires careful planning and wise spending decisions. A spending plan based on what your family considers to be most important can help balance spending with available income and resources. Keeping track of spending will help ensure that money is available for the things your family needs most.

Step 4 – Review, Track Expenses, and Revise Spending Plan

Once you have developed an initial spending plan that provides for essential family needs and balances expenses with income, review the proposed plan with your family. Spending decisions will affect the whole family, so it is important to talk with your family and explain that everyone needs to be involved with the process of developing a spending plan.

Family members can decide what their needs and wants are and rank these needs according to importance. Becoming aware of your family’s needs can help you work out the details of a spending plan. If family members understand that tough choices must be made, and if they have a voice in deciding, they will be more willing to accept decisions that require a sacrifice on their part.

Keep a record of what is spent in each expense category to discover if the amount matches what was budgeted for that category. If more was spent in one category than planned, a reduction of spending in another category will be required.

Be sure to involve other family members in tracking expenses. One suggestion is to give each family member a small spiral notebook for daily expenses or use a shoe box or drawer to keep receipts. Label receipts so you know the expense category for each one.

After tracking expenses for several months you may find your family is operating “in the red.” If so, a couple of things must happen: expenses must be reduced, income must increase, or both. Arrange for a family conference. Lay out the records of income and monthly expenses. Were there differences between your family’s priorities and its actual spending patterns and income? Discuss where cuts can be made with the least sacrifice in family welfare. Examine spending by category. Discuss ideas for either increasing or decreasing the amounts.

If the spending plan did not adequately provide for your family’s needs, it may need to be revised. If the plan suited your family’s needs but members had trouble sticking to it, stricter self-discipline and better management may be required in future months. Enlist better cooperation within your family on spending.

A spending plan is something to keep working and reworking until it suits your family and satisfies individual members. Do not expect to have a perfect spending plan the first time. With each revision, improvement can be expected. Although you may be satisfied with the present plan, it may need to be changed from time to time because of changes in family circumstances, such as a serious illness or accident. As conditions change, reorganize your plan around new goals, needs and wants.

Step 3 – Balance Income and Expenses

As you think about what was spent in each of the categories and plan how much to spend now, ask these questions:

1. Which expenses are essential to your family’s well-being?
2. Which expenses have the highest priority?
3. Which areas can be reduced to keep your family’s spending within its income?
4. How much can be afforded in each category?
   

Subtract total monthly expenses from total monthly income. The result is the amount that is “extra” or must be “cut” from expenses. If cuts are necessary, adjust the amounts you plan to spend in each expense category.

   
Add up the revised expenses and compare the total to current income. You may discover you don’t have enough projected income to cover current fixed obligations, or to pay necessary living expenses. If this is the case, some difficult decisions must be made. What can be done if expenses are greater than income?

• Increase income. What are the possibilities for part-time or temporary work to help supplement income. Can other family members seek employment?
  

• Cut spending. You may be able to cut back on utilities, food, gasoline, clothing, recreation, contributions or gifts. USDA has low cost menus and other resources that help families reduce expenses (http://www.cnpp.usda.gov/USDAFoodCost-Home.htm).
  

• Reduce your fixed expenses. If too much income is going to fixed expenses, such as housing or debt payments, there may not be enough money left to cover your other living expenses. This dilemma may make it necessary to refinance loans, move to lower-cost housing, or sell the property to reduce fixed expenses. 
  

• Look at other assets. What savings, investments or property could be used or converted to cash to meet expenses?
  

What can be done if income is greater than expenses? Allocate the extra dollars to savings for future short-term and long-term goals (education, buying a home, retirement). 

Step 2 – Your Monthly Expenses 

People frequently ask: What should our spending plan look like? How much should we spend for food, clothing, and transportation… and so on? Are we spending too much on housing?

Households are rarely alike – thus a “typical’’ spending plan will not apply to everyone. There can be no hard-and-fast rules for family spending, because individual needs, tastes and economic circumstances vary from family to family – even when they have identical income and the same number of family members. However, there are various sources of cost of living information that can be used as guidelines to compare how your family’s spending differs from the average spending pattern of others.

• Categories: If you have tracked your expenses, you know how much is spent monthly for family living expenses. If not, use records, such as canceled checks, bills, and credit card and other receipts to figure out how much is spent. List the amount for each category on the appropriate lines in Step 2 of the worksheet from Step 1.

– Housing: mortgage or rent payments, property taxes

– Utilities: electricity, gas, oil, phone, water, cable TV, Internet

– Household Operations and Maintenance: repairs, cleaning supplies, paper supplies, equipment, pets and supplies

– Food: groceries, eating out, school lunches, snacks

– Transportation: gas, car repairs, maintenance, parking, bus, taxi fares

– Medical Care: doctor, dentist, clinic, hospital, medicine, glasses

– Credit Payments: car payments, installment loans, credit cards, charge accounts (If you break out the credit payments into the appropriate family living expense category, you will have a more realistic idea of the actual costs for clothing, entertainment and eating out, for example).

– Insurance: health, life, property, car, disability, long-term care

– Clothing and Personal Care: new clothing purchases, laundry, dry cleaning, hair care, cosmetics, toiletries

– Education and Recreation: books, magazines, newspapers, lessons, tuition, hobbies, club dues, sports, entertainment, vacations

– Miscellaneous: child care, gifts, contributions, personal allowances, child support, alcohol, tobacco

– Savings: funds set aside for seasonal and occasional expenses, short-term and long-term goals (college fund, retirement).

Remember, not all expenses are monthly. Because some items, such as property taxes or insurance premiums, come once or twice a year, families often forget about them and do not have the money to pay for them when the bill arrives in the mail. Be sure to include your non-monthly expenses in the spending plan.