Financial Foundation
Why is a spending plan important? A spending plan will help you...
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Live within your means
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By avoiding overdrafts fees, late fees and excessive debt
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Reach your financial and personal goals
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By identifying non-essential spending
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Prioritize your spending
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By ranking expenses
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Reduce stress
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By maintaining a savings account
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Income - Money you receive (ex: wages/tips, child support, pension, dividends, social security, alimony, rental income)
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Expenses - Money you spend, save or give (ex: housing, charity, debt, retirement)
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Fixed expenses - predictable, usually consistent every month
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Variable expenses - change, based on consumption
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Periodic expenses - occasional, one to four times per year
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Components of a Spending Plan
Balanced
Spending
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80-10-10 Rule - Give 10% of your income away, Save 10% and Live off 80%
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Expense Ratios - Give 10%, Save 10%, Debt payments 10%, Living expenses 20%, Transportation 20%, Housing 30%
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Current Balance - the total amount of money in the account at the beginning of the business day (excluding pending transactions)
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Available Balance - the total amount of money you may withdraw or use for credit purposes (includes pending transactions)
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Actual Balance - the total amount of money available based on all transactions you have authorized (requires tracking)
Distinguishing
Balances
Debt-to-Income
Ratio
The percentage of your income that goes to debt payments. Creditors use this to determine if you can "afford" additional debt. To calculate, divide your total monthly debt payments by your monthly gross income, then multiply by 100.
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Needs are essential to life.
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Wants make life more enjoyable.
A balanced spending plan should include some enjoyable items. However, use caution to avoid overspending. If your expenses total more than your income, rank your expenses by importance and reduce or cut out the expenses at the bottom of the list.
Prioritize Spending