You have probably been told to use a budget most of your adult life. Even though a budget is the best way to manage your finances, it often feels like a dirty word and starting one can feel overwhelming. So, for the sake of being positive, let’s call it an expense plan. There! That sounds better!
Are you worried that you’re overspending or under saving?
The best way to reach financial freedom is to know the state of your finances and create a solution that you can control! Learning how to design and follow an expense plan could eliminate that stressful feeling you get sometimes after making a purchase. You can do it – one step at a time!
What is an expense plan?
An expense plan is a plan you create to determine how much money you receive each month and how much you spend.1
- The 50/30/20 Plan
- The Envelope System
- Pay Yourself First
- The Zero-Based Plan
We’re going to use the 50/30/20 method in our example, but you can learn more about different types of expense plans.2
What is the 50/30/20 Plan?
This basic method is super easy to follow. You split your expenses into 3 categories.
Be sure to check out Step 6 so you don’t miss how to put your plan into action!
Step 1: What is your net monthly income?
Your income sources look different at different stages of life. The key is to use your net income: what you have available to spend after taxes.
Pro Tip: If you are creating a plan for you and your significant other, include the total household income.
Common sources of income:
- Employment Income (W2 or W9)
- Retirement Account and/or Annuity Income
- Social Security
- Other Income: Rental Income or Investments/Dividends
Step 2: What are your recurring Necessities?
This is 50% of the pie chart. Needs are expenses that you must pay to survive. They are typically recurring bills, either monthly or annually.
Pro Tip: If they are annual, be sure to divide by 12 for the purposes of your expense plan.
- Housing: Mortgage, Rent, HOA Fees, Homeowners Insurance
- Other Housing: Electric, Water, Gas
- Groceries and Prescriptions
- Car Payment, Car Insurance, Gas
- Health Insurance Premiums
- RV and/or Boat Payments or Insurance
Be sure to review all your banking and credit card statements to ensure you don’t leave out any of these costs by accident.
Step 3: What are your Wants?
Remember this should be 30% of your expenses. Some of these may feel like needs, but if you had to, these items could be reduced.
- Internet, Cable TV, and any Streaming Services
- Golf, Memberships, Clubs
- Restaurant Dining
Pro Tip: Not sure how much you’re spending? Look over your last 3 months of banking and credit card statements – the total may surprise you.
Step 4: Commit 20% to Savings and Debt Reduction
20% may feel excessive, but this money will save you in stressful situation!
Use the money to…
- Reduce your toxic debt, which is anything with a high interest rate: credit cards, car payments, and home equity loans.
- If you’re still saving for retirement, this money will help fund that.
- Use this money to establish an emergency fund to cover unexpected expenses like medical bills, home and auto repairs, and unexpected family expenses.4
- Perhaps one of your aspirations is to fund a life insurance policy to leave a family legacy.
The ultimate goal is to reduce your anxiety and ensure you don’t outlive your retirement money!
Pro Tip: If you want to make a large purchase like buying a vacation home or an RV, increase your savings percentage to reach your goal sooner!
Step 5: Balance Your Expenses
Now that you’ve collected all the information you need, subtract your 50/30/20 expenses from your monthly income.
If you’re over… (expenses exceed income)
- Don’t worry! We can make adjustments.
- Reduce your “Wants” – Maybe your wants must be 20% of your budget based on your unique situation
- Try to Reduce your “Needs” – Can you lower your home and auto insurance premiums?
- Don’t get discouraged. Remember that some of your “Necessities” may be short term because you will pay off your car loans before you know it!
If you’re under… (income exceeds expenses)
- Increase your Savings
- Plan an extra trip!
- Still have extra? Balance the extra between the Wants & Savings
Pro Tip: Be realistic – creating a plan you can adhere to is vital. Each small step now leads to a huge win!
Step 6: Sticking to an expense plan can feel like a daunting task, but you can be successful!
Creating an expense plan without tracking your monthly transactions is like planning a road trip and leaving the RV in the driveway. Take control of your finances!
- Easily manage your expenses by using a free spreadsheet template!
- Want to create your own spreadsheet from scratch? Find some Pro Tips here
- Not a spreadsheet person? Check out popular mobile budget apps
You will need to make adjustments along the way.8 This doesn’t mean that you’re not doing it right. It means that you’re on top of things and life changes. You know yourself better than anyone else, and your financial goals are worth achieving!
We are always here to help you! Start your financial planning today by contacting us for a free consultation.