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Plan Well, Retire Well

Saving and investing your money

The Easy Way to Set Up a Spending Plan.

Have you ever thought about setting up a spending plan (aka budget) but it seemed like too much work? Here's an idea that can help jumpstart that process.

Usually financial experts suggest that you track your expenses for a month first, to see where your money is actually going. Then you create your budget based on that information. That's a useful process. But I have a different approach that will let you establish a pretty realistic budget today or maybe tomorrow, instead of next month.

Start by doing a quick-and-dirty estimate of your monthly expenses by looking backward at the past month. For most people today, the vast majority of our expenses leave a paper (or electronic) trail.

  1. Choose categories that reflect your expenses (housing, food, entertainment, healthcare, transportation, etc.). Make columns for each of these, using a spreadsheet or just a sheet of paper with columns drawn in.
  2. Look at your checking account, your credit card statements, your monthly bills, etc. to find records of your expenses.
  3. List each expense under one of your categories, and then total your expenses by category.
  4. The only thing you'll be missing is cash expenses. Can you guestimate those by looking to see how much cash you withdrew from your checking account last month?

This might take you just one hour, maybe two if you're a perfectionist. And you're ready to create your spending plan!

Looking at last month's expenses, estimate how much you'll spend in each category this month. Also think through the year and make note of non-monthly expenses you need to include in your budget, such as car registration, family vacation, holiday celebrations, memberships, etc. Also make an estimate of how much you'll spend on unexpected expenses such as emergency car repairs, doctor visits, and veterinarian services.

You can find forms for spending plans lots of places. There's one created by us – University of Illinois Extension – at The Department of Labor has a great one in their Savings Fitness book (download PDF), and there's even an interactive (fillable) version of it at Click on #5. Register if you'd like the site to save your work.

Once you've created your spending plan, track your expenses for the coming month so that you can compare your actual expenses with your plan. Total your expenses by category every week or at the end of the month. Weekly can make the task more manageable if you're manually adding up the numbers. Plus, you can catch problems sooner, such as a category where you're spending much more than expected.

Don't expect your expenses to match your plan perfectly. In my mind, that's not even the goal. The goal is to have a plan that will guide your spending decisions during the month and help you stay on track overall.

Here's a story that will show you what I mean.

Years ago, I was teaching a class about budgeting where we met two times, one week apart. At the first class, I asked the participants to identify three kinds of expenses that they spent cash for. (Nowadays, I would probably ask about expenses they pay with a debit card, since many of us use so little cash.) We were learning envelope budgeting, where you have an envelope for each spending category. In each envelope, you put the amount of money you expect to spend in that category. One of the women -let's call her Maria – chose lunch at work, groceries, and I've forgotten what the third category was.

The next week, I asked the participants how it went. Maria said, "It didn't work." I was a little surprised, so I asked her to tell me what happened.

Maria explained, saying, "I usually go out to lunch once a week, on Friday. So I put $15 in my 'lunch at work' envelope. On Friday, I went out to lunch and spent almost exactly $15. But then on Monday, someone in the office decides that we have to take Matt out to lunch because it's his birthday. Now I've got to buy lunch for myself, plus chip in for his. It was $25!"

"What did you?" I asked her.

"I was planning to go to the grocery store after work, so I had my grocery envelope with me. I took the money out of that."

I asked, "And what happened when you went to the grocery store?"

"Well, now I only had $100 in that envelope instead of $125. So I had to buy different things – cheaper things – than I had planned, and I put off a few things."

At that point I asked, "What would you have done at the grocery store if you hadn't divided your money up into envelopes, if you just had all your cash in your wallet?"

Maria answered, "Oh, I would have spend the whole $125 like I usually do!"

I told the group that, to me, the plan had worked. Because she knew she had spent more on lunch that she had planned, she knew she had to make up the difference somewhere else. And she did it! Overall, her spending plan stayed on track.

By having a plan, she was able to make better decisions when unexpected circumstances arose and therefore she had a better chance of staying within her overall budget. That's what I call success!

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