Budgeting: Making a plan

Prepared by Jane Conroy,

Extension educator

During tough economic times, many people ask, “How can I keep up with the expenses of food, gas, and other necessities? I am just making it from paycheck to paycheck as it is now.” According to United States Department of Agriculture’s Cost of Food at Home,1 the average monthly cost for a “thrifty” food plan for a family of four with small children was $450 in August 2006, while that same plan cost $525 in August 2008. People’s use of credit is at an all time high. In 2006, Maine ranked 24th with a median card-holder debt of $1,651, according to America’s for Fairness in Lending. So what are some ways you can make ends meet?

One way is to develop a budget. A budget is a written plan or guide for spending and saving your money. It is a tool to help you save more and spend less. A good budget allows for unplanned as well as expected expenses.

Involve everyone
Discuss your proposed budget with anyone else who might be affected by it. For instance, talk with family members or roommates about the household budget. It is important that everyone knows where the money goes and agrees on priorities. In that conversation, be clear about wants versus needs. This talk offers time to question purchases and may involve some compromises.

First step: Track your spending
The best way to start building a budget is to track your spending. In order to know where you can save money, you must start by tracking how you’re spending your money now.

Keep a log of how much you spend and on what. Select a system that works for you, whether it consists of keeping a small notebook in your pocket, keeping all of your receipts, or writing expenditures on a piece of paper. By having this list, you will see where you need to save-and what you can cut. For example, you may decide that instead of buying coffee in the morning, you will bring it from home and save.

Calculate income and expenses
Income
Now take a look at your income sources. These may include wages, interest, child support payments, benefits such as unemployment or social security, and any other source of income you may have. Estimate your income for your monthly budget.

Expenses
Fixed versus variable expenses
After tracking your spending, you should have a fairly close estimate of expenses. There are two types of expenses: fixed and variable.
Fixed expenses are known costs for a period of time-for instance, each month’s car payment, rent, and insurance. Variable expenses are less predictable and harder to budget for-for instance, the cost of food, your electricity bill, and car repairs. These expenses can change from month to month.

Monthly versus longer-term expenses
There will be expenses that are large enough that you will need to save for them year round. Car insurance and property taxes are two examples. Holiday spending is another area where planning is critical to prevent overspending.

Develop your budget
Now use your monthly income estimate and your spending records to develop your budget-your plan for spending and saving your money. Use the budget worksheet at the end of this publication to get started.

When building your budget, don’t forget those unexpected surprises and emergencies-the blown car tire, the broken water heater, etc. Creating a line item in your budget to save for emergencies is a financial strategy that can help prevent credit card debt.

As a family, you should also allow for some flexibility. Remember to plan for some fun in your budget if you can, such as a periodic dinner out or movie.

Pay yourself first
Your budget should include a line item for savings. This way, when you sit down to pay your bills, you also write a check to yourself.
Starting a regular saving plan is one of the best investment strategies you can use. Set aside a small amount-say, $25 a week-to see how it can quickly add up. After six months or so, place it into a special account for emergencies or future investments.

Keep tracking
After you develop your budget, don’t stop tracking your spending. Continue to keep good records so that you can evaluate your budget from time to time.

Set goals
Your budget is a tool to help you reach your goals. Goals can be long- term or short-term. Saving $500 to go on a family vacation, or $3,500 to buy a used car, are examples of shorter-term goals. Plans for a college education or retirement tend to be longer-term goals. Both types of goals can be addressed in your budget at the same time. If you want to pay off your credit cards while saving for a car, it can be done. Just make sure that both goals are in your budget. This gives you a planned guide to reach these goals.

Develop a regular time frame and system for paying bills Most people try to manage on a monthly budget. If you are paid weekly, plan to pay bigger expenses at the end of the month. That way you can set aside a small amount each week for the big item (for instance, car insurance), and you will have the amount you need when the bill arrives. Start with an organized plan for purchases as well as paying
bills. Remember to be flexible and try a system for a couple of months before locking yourself into it.

Making adjustments
So you have created your budget and continued to track your spending. How did you do?

Did your income cover your expenses? Great! Keep up the good work and increase your savings contributions. If your expenses were higher than your income, then there are adjustments that you can try.

Look at fixed expenses as well as family priorities. Basic needs (housing, food, transportation, medical care) should come first. Now look at those variable items. Are there ways you can eliminate or reduce them? Can you cancel magazine subscriptions? Are there things that can be done by you or others less expensively? Before you buy something, can you explore other options, such as borrowing or buying used? Check out thrift stores for used items. Can a delay in purchase be combined with a sale or value coupon? Can you substitute generic brands? Or there may be ways to cooperate with friends, family, neighbors, and coworkers to share costs such as child care or transportation to work.
If trying ways to save or readjust spending isn’t making your budget balance, then you may need to explore ways to bring in more money.
Ideas include recycling cans and bottles, working extra hours, getting a second part-time job, or starting a hobby that generates some extra income.

Although the formula is simple-increase your income or reduce your spending-a balanced budget takes time and commitment. But the reward can be great for you and your family.
– Courtesy of the University of Maine Cooperative Extension