How to Create a Spending Plan: A Step-by-Step Guide

In this podcast episode of "The Make Room Show," we had an insightful conversation with master money coach Mikelann Valterra about the importance of financial clarity and overcoming the often paralyzing "money fog." Inspired by this enlightening discussion, today's blog post will delve deeper into one of the key topics we touched upon: creating a spending plan. We'll guide you step-by-step on how to develop a spending plan that aligns with your goals, reduces financial stress, and helps you achieve a balanced and fulfilling financial life.

Common Expenses to Include in Your Spending Plan

Creating a spending plan involves understanding and categorizing your expenses. This ensures you stay on top of your finances and are prepared for both regular and unexpected costs. Here’s an in-depth look at the common expenses you should consider when crafting your spending plan:

Fixed Expenses

Fixed expenses are those that remain relatively constant each month. These are essential costs that you can predict and plan for easily.

1. Rent/Mortgage Your monthly housing payment is typically one of your largest fixed expenses. This includes rent for an apartment or mortgage payments for a home. Ensure you account for property taxes and insurance if they're included in your mortgage.

2. Utilities Essential services such as electricity, water, gas, sewage, and trash services fall under this category. These are necessary for maintaining a livable environment.

3. Internet and Cable Monthly charges for internet and cable services are fixed expenses, as these bills usually remain consistent each month. Evaluate your needs regularly to avoid overpaying for unused services.

4. Phone Your mobile phone and landline bills are recurring expenses that need to be accounted for in your spending plan. Consider reviewing your plan periodically to ensure you’re getting the best deal.

5. Insurance Health, dental, vision, auto, home, and life insurance premiums are all fixed expenses. These payments are essential for protecting your health, property, and loved ones. Make sure to review your policies annually to ensure adequate coverage and competitive rates.

6. Car Payments Monthly loan or lease payments for vehicles are fixed expenses that you must budget for. Include costs for insurance and registration in this category.

7. Childcare/Education Tuition fees, daycare, and other school-related expenses are often fixed and can represent a significant portion of your budget. Factor in additional costs for supplies, uniforms, and extracurricular activities.

8. Subscriptions Monthly or annual fees for streaming services, magazines, or memberships should be included in your fixed expenses. Regularly review these subscriptions to cancel any that you no longer use.

Variable Expenses

Variable expenses fluctuate from month to month based on your usage and lifestyle choices. These can be more challenging to predict but are equally important to manage.

1. Groceries Regular shopping for food and household supplies is a significant variable expense. The amount you spend can vary based on your eating habits and family size. Consider using meal planning and bulk buying to manage costs.

2. Dining Out Eating at restaurants, cafes, and ordering takeout are common variable expenses that can add up quickly. Track these expenses to identify areas where you can cut back.

3. Transportation Costs for gasoline, public transportation, ride-sharing services, and parking fees fall under variable expenses. These costs can fluctuate based on your travel habits. Carpooling, using public transit, and maintaining your vehicle can help manage these expenses.

4. Entertainment Expenses for movies, concerts, events, and other recreational activities are variable and can vary significantly from month to month. Allocate a specific amount for entertainment to avoid overspending.

5. Personal Care This includes haircuts, beauty treatments, and personal hygiene products. These expenses can fluctuate based on your needs and preferences. Consider setting a monthly budget for personal care to keep spending in check.

6. Clothing Purchases of new clothes and accessories are variable expenses. Your spending in this category can vary based on sales, seasons, and personal style. Plan for seasonal clothing purchases and look for sales and discounts.

7. Healthcare Out-of-pocket medical expenses, prescriptions, and over-the-counter medications are variable costs that can arise unexpectedly. Maintain a health savings account (HSA) or flexible spending account (FSA) if available to manage these costs.

Periodic Expenses

Periodic expenses are those that occur less frequently than monthly but are important to plan for. These can include quarterly, semi-annual, or annual expenses.

1. Property Taxes Annual or semi-annual property tax payments are significant periodic expenses that need to be planned for in advance. Set aside money each month to ensure you have enough when the payment is due.

2. Car Maintenance Regular services, repairs, and registration fees for your vehicle are periodic expenses that can be anticipated but not always monthly. Budget for routine maintenance and unexpected repairs.

3. Home Maintenance Repairs, upgrades, and seasonal maintenance tasks for your home fall under periodic expenses. Planning for these can prevent unexpected financial strain. Set aside funds for annual maintenance and unexpected repairs.

4. Insurance Premiums Annual or semi-annual payments for various insurance policies, such as life, home, or auto insurance, are periodic expenses that need to be accounted for. Regularly review your policies to ensure you're getting the best rates and coverage.

5. Holiday Gifts Presents for holidays, birthdays, and special occasions are periodic expenses that can add up, especially during certain times of the year. Start saving early to spread out the cost over several months.

6. Vacation Travel costs, accommodations, and activities for trips are periodic expenses. Planning and saving for vacations can help manage these costs without impacting your regular budget. Consider setting up a dedicated savings account for travel.

Savings and Investment

In addition to managing your expenses, it's crucial to allocate part of your income towards savings and investments to secure your financial future.

1. Emergency Fund Regular contributions to a savings account designated for emergencies are vital. This fund should cover 3-6 months of living expenses. An emergency fund provides financial security in case of job loss, medical emergencies, or unexpected expenses.

2. Retirement Savings Contributions to retirement accounts like 401(k), IRA, or pension plans are essential for long-term financial security. Aim to contribute at least 15% of your income to retirement savings.

3. Education Fund Savings for children’s education or personal continuing education should be a part of your financial plan. Consider using 529 plans or other education savings accounts for tax advantages.

4. Investment Accounts Regular investments in stocks, bonds, or mutual funds can help grow your wealth over time. Diversify your investment portfolio to manage risk and achieve your financial goals.

Debt Repayment

Managing and repaying debt is a critical component of a healthy spending plan.

1. Credit Card Payments Monthly payments towards credit card balances help manage and reduce debt. Aim to pay more than the minimum payment to reduce interest charges and pay off debt faster.

2. Student Loans Repayment of education loans should be prioritized to avoid accumulating interest and to free up future income. Explore options for refinancing or income-driven repayment plans if needed.

3. Personal Loans Payments towards personal loans or lines of credit should be included in your spending plan to manage and reduce debt effectively. Focus on paying off high-interest loans first.

Miscellaneous Expenses

Miscellaneous expenses are those that don't fit neatly into other categories but are still important to consider.

1. Gifts and Donations Charitable contributions and gifts for others are important expenses that reflect your values and commitments. Allocate a portion of your budget to giving.

2. Pet Care Expenses for food, veterinary care, and pet supplies are necessary for pet owners. Plan for routine care as well as unexpected veterinary expenses.

3. Fitness Gym memberships, fitness classes, and sports equipment are expenses that support your physical health and well-being. Look for discounts or alternative fitness options to manage costs.

4. Subscriptions and Memberships Costs for club memberships, professional organizations, and online services should be tracked and managed. Regularly review these subscriptions to ensure you're getting value for your money.

Watch the FULL VIDEO on YouTube!

Steps to Creating a Spending Plan

Now that we’ve covered the common expenses, let’s dive into the detailed steps for creating a spending plan that works for you:

Step 1: Assess Your Current Financial Situation

• Gather Financial Documents Start by collecting all your financial documents. This includes bank statements, bills, pay stubs, and any other documents that give you a clear picture of your income and expenses.
• Calculate Your Income Determine your total monthly income from all sources. This includes your salary, bonuses, freelance work, and any other income streams. Make sure to consider all sources of income to get an accurate picture of your financial situation.
• List All Expenses Make a comprehensive list of your monthly expenses. This should include both fixed costs (like rent and utilities) and variable costs (like groceries and entertainment). Use past bank statements and receipts to ensure you capture all expenses.

Step 2: Categorize Your Expenses

• Fixed Expenses These are regular monthly costs that don’t change much, such as rent, mortgage, utilities, car payments, insurance, and subscriptions. Categorizing fixed expenses helps you identify essential costs that must be covered each month.
• Variable Expenses These fluctuate each month and include items like groceries, dining out, entertainment, and personal care. Tracking variable expenses helps you identify areas where you can cut back if needed.
• Periodic Expenses These are expenses that occur less frequently, such as quarterly taxes, annual insurance premiums, or holiday gifts. Planning for periodic expenses helps you avoid financial surprises.

Step 3: Track Your Spending

• Use Tools and Apps Utilize budgeting tools or apps to keep track of your spending. Some popular options include Mint, YNAB (You Need A Budget), or even a simple spreadsheet. These tools can help you monitor your spending in real-time and stay on track.
• Review Bank Statements Regularly review your bank and credit card statements to monitor your spending habits and ensure you’re staying on track. Look for patterns in your spending and identify any unnecessary expenses.

Step 4: Set Financial Goals

• Short-Term Goals These could include saving for a vacation, paying off a specific debt, or building an emergency fund. Short-term goals should be achievable within a year and help you stay motivated.
• Long-Term Goals Examples include saving for retirement, purchasing a home, or funding a child’s education. Long-term goals require more planning and discipline but are essential for your financial future.
• Prioritize Goals Determine which goals are most important and create a timeline for achieving them. Prioritizing your goals helps you allocate your resources effectively and stay focused on what matters most.

Step 5: Create the Spending Plan

• Allocate Income Assign your income to different categories based on your expenses and goals. Make sure your expenses do not exceed your income. Use the 50/30/20 rule as a guideline: 50% for needs, 30% for wants, and 20% for savings and debt repayment.
• Emergency Fund Include a category for building an emergency fund, typically 3-6 months of living expenses. An emergency fund provides financial security in case of unexpected expenses.
• Debt Repayment Allocate funds for paying down debts, focusing on high-interest debts first. Prioritizing debt repayment helps you save money on interest and reduce financial stress.
• Savings and Investments Set aside money for savings and investment goals. Automate your savings to ensure consistency and make it easier to reach your goals.

Step 6: Implement and Monitor the Plan

• Stick to the Plan Follow the spending plan closely, making adjustments as necessary. Staying disciplined and committed to your plan is key to achieving your financial goals.
• Regular Reviews Review your spending plan regularly (monthly or quarterly) to ensure you are on track. Regular reviews help you identify any issues and make adjustments as needed.
• Adjust for Changes Life changes, such as a new job, moving, or unexpected expenses, may require adjustments to your plan. Be flexible and ready to adapt your plan to reflect your current situation.

Step 7: Refine and Adjust

• Evaluate Progress Periodically assess your progress toward your financial goals. Regular evaluations help you stay motivated and make informed decisions about your finances.
• Make Adjustments If you find that certain areas need more funding or if you have surplus in some categories, adjust your plan accordingly. Making adjustments ensures that your plan remains relevant and effective.
• Stay Flexible Be open to changing your plan as your financial situation and goals evolve. Staying flexible allows you to adapt to new opportunities and challenges.

Additional Tips

• Automate Savings: Set up automatic transfers to your savings and investment accounts to ensure consistency. Automation makes it easier to save and helps you stay on track.
• Limit Impulse Purchases: Create a waiting period for non-essential purchases to avoid impulsive spending. This helps you make more thoughtful spending decisions.
• Seek Professional Help: Consider consulting with a financial advisor or money coach for personalized guidance. Professional advice can help you optimize your plan and achieve your financial goals faster.

Creating a comprehensive spending plan involves understanding and categorizing your expenses, setting financial goals, and regularly monitoring and adjusting your plan. By following these steps, you can manage your money effectively, reduce financial stress, and support your long-term financial goals. Remember, the key to successful financial planning is consistency and flexibility. Regularly review and adjust your plan to reflect changes in your financial situation and goals. Start today, and take control of your financial future!

Join the Paper Purge Project! Discover how you can live with less paper in your life.  Purge the papers that you really do not need to keep and implement a system for keeping the papers you do need to keep organized!

Jennifer will coach you on how to organize:

• Files
• Finances
• Manuals
• Snail Mail
• Email
• School Papers and Memorabilia
• Receipts
• Taxes
• Business Cards
• Magazines and Newspaper
• And more!

Mikelann Valterra is an author, speaker, and master money coach who helps women around the world rise above the money fog, transform their relationship with money, and design their ideal life.For twenty-five years, Mikelann Valterra, MA, AFC has been a thought leader in financial psychology. She has written, spoken, and been interviewed extensively on powerful, practical ways to reduce money anxiety and teaches effective methods for earning, saving, reducing debt, and managing money. Her new book, Rise Above the Money Fog is now available online.

 ⁠⁠seattlemoneycoach.com⁠⁠ 

 ⁠⁠instagram.com/seattlemoneycoach⁠⁠ 

 ⁠⁠facebook.com/MikelannSeattleMoneyCoach⁠⁠ 

About your host, Jennifer Ford Berry: Jennifer is the host of the Make Room podcast and the founder of the⁠⁠ Created Order Neighborhood⁠⁠, an online community of women who want to live a life of order and purpose. She is the author of five books, including the Organize Now! series and her latest, Make Room. Jennifer was previously the regular organizing expert on the TV show Winging It, Buffalo Style. , and has appeared as a guest expert on several television and radio shows, as well as in national magazines and newspapers. Jennifer lives in western New York with her husband and two children. She works both hands-on and virtually with her clients to help them eliminate clutter and live their dreams.

Where to find Jennifer:

 ⁠⁠⁠⁠Website⁠⁠⁠⁠ 

 ⁠⁠⁠⁠Instagram⁠⁠⁠⁠ 

 ⁠⁠⁠⁠Facebook⁠⁠⁠⁠ 

 ⁠⁠⁠⁠Youtube⁠⁠⁠⁠ 

 ⁠⁠⁠⁠Pinterest⁠⁠