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How you spend your money today determines what you have six months from now, a year from now, five years from now, or in your lifetime. You control your financial destiny. You are responsible for the amount of money you earn and the amount of money you spend. Successful money management requires careful planning. It also requires self-discipline and the ability to say no to unnecessary spending. The ability to manage money has to be learned, developed, and practiced on a daily basis. This section discusses six steps to help you become a successful money manager. They are:
Step One: Determine Your GoalsGood money management begins with goal setting. Goals give you direction and a purpose for the way you spend your money. They motivate and encourage you as you work toward doing things that are important to you. In setting goals, think about the things that are important to you and your family. Create a list that can help you decide which things are more important to you than others. Select the things that you and your family feel are most important and place a "1" beside them. Place a "2" beside the things that are somewhat important, and a "3" beside the things that are not very important to you and your family. As an individual, you may have trouble deciding which item is more important than another. It's even harder when two or more people live together as a family unit and share money. Communicating, compromising, and giving priority to those items that benefit the entire family can help you reach results that are the most satisfying to all family members. Once you have decided what is important to you, then you can see the things you want to work toward. For example, if you placed a "1" beside "family activities," your goal may be to go on a family vacation. You may find it helpful to think first about long-term goals -- those you hope to reach in 10 or 20 years or perhaps even longer. Next, decide your goals for the more immediate future -- the next 5 years, for example. Then list your short-term goals for the coming year. This way, your budget includes some savings toward long-term and intermediate goals, and you will not let short-term goals push other goals aside. Be as specific as possible in setting goals. Your family may decide its long-term goals are a debt-free home, education for children, and savings for retirement. For the coming 5-year period, goals might be buying a car, making a down payment on a home, and buying a washer and dryer. Goals for this year might be reducing debts, establishing an emergency fund, and buying a vacuum cleaner. Establish goals that are realistic, measurable, and achievable within a given time period. By following these three criteria, you can make your dreams come true within a specified period of time. When you have decided your goals, write them down on Worksheet 1. You will want to refer to them as you develop your spending plan.
Step Two: Calculate Your Living ExpensesOnce you have listed your goals, the next step to successful money management is to calculate your expenses. Expenses can be classified as fixed, flexible, or periodic. Fixed expenses are the budget items that you pay a specific amount of money for every month for a specified period of time. Some examples of fixed expenses are rent or mortgage, car loans, and credit card payments. Flexible expenses vary from month to month and can be controlled and managed to some extent. They are generally more difficult to forecast than fixed expenses. Examples of flexible expenses include food, clothing, gas, telephone, and personal care. Periodic expenses -- such as insurance, car license tags, and Christmas gifts -- occur perhaps one or more times a year, but not monthly. The key to managing periodic expenses is to "divide and conquer." Divide the yearly total by 12 and set aside that amount each month. When the expense occurs, the money is there. Using Worksheets 2A and 2B, list your family's current expenses. Canceled checks, receipts, bills, and bankbooks can serve as reminders for helping you estimate realistic amounts for each applicable category. Be sure to include all expenses as accurately as possible. Remember, small expenses add up and can be important factors in developing a workable spending plan.
Step Three: Estimate Your IncomeThe third step to successful money management is to estimate your income. This should not be difficult, since the greatest part of income usually comes from salaries or wages. Other sources of income include:
List your income on Worksheet 3. Write down all funds that you expect to receive during the coming year. Start with fixed amounts that family members get regularly, such as wages or pensions. Put down the variable income you anticipate -- interest from savings accounts, dividends from stocks, gifts, and money from other sources. When your earnings are irregular, base your estimate on your previous income and current prospects. If your income fluctuates sharply -- as it may for seasonal workers, commissioned salespersons, farmers and other self-employed people -- play it safe by making two estimates. Work out the smallest and largest figures you can reasonably expect. Plan first on the basis of the low-income figure, then consider how you will use additional amounts if they are available. Income is usually figured on a monthly basis. For persons who are paid on a weekly or biweekly basis, monthly income can be figured as 4 1/3 times the weekly rates. However, it is better to estimate low and use the four-week income as your baseline. This leaves the extra four weekly or two biweekly paychecks as a "bonus" that can be set aside for savings, used to meet emergency expenses, or for a special occasion such as Christmas expenses.
Step Four: Balance Your Income With Your ExpensesOnce you have a clear picture of your expenses and income, you can begin to allocate your money. This involves comparing income and expenses, (on a monthly and yearly basis) and reaching a balance that is realistic and workable. If your income is irregular, you must take extra care when you allocate. You will want to set aside enough extra in the months when you have higher income to cover the months when your income is reduced. When the budget for the year is not in balance, then there is trouble. Three alternatives exist. One is to use savings or borrow money to meet the total budget deficit for the year. This can prevent you from reaching your goals. A second alternative is to reduce lower priority expense items, or perhaps even cut them out of the budget. This may require sacrifice and the determination and discipline to stick to your decisions. A third alternative is to increase your income by taking a second job, finding another job that pays more, or adding another earner to the family. This is probably the most difficult alternative, as it is likely to result in a significant change in lifestyle. In addition, finding another job may be difficult or even impossible.
Step Five: Develop a Spending PlanNow that you have established a balance between estimated income and expenses, the next step is to develop a spending plan. A spending plan may cover any convenient budget period. However, most plans are for 12 months and coincide with the calendar year. Using a record-keeping book, such as MSU-ES Form 126, Family Expense Record Book, plan your spending by deciding category by category how much to spend. Use the information you recorded in Worksheet 2 to help you decide whether to continue your present pattern of spending or to make changes. If you are satisfied with what your dollars have given your family in the past, allow similar amounts in your estimates of future expenses. If you are not satisfied with what you got for your money last year or last month, look critically at your spending. Until you study your records, you may be unaware of overspending and poor buying habits. Be realistic in revising your allowances for expenses, however. Table 1 can suggest overall guidelines for spending. These guidelines, along with your record of expenses, can help you decide if the revisions are realistic and workable. Be sure to relate your financial goals listed on Worksheet 1 to your future expenditures. Check to see that future spending plans include those items which you and your family have determined to be important to you. Write down how much you plan to spend in each category for the budget period; then try to stick to your plan. As purchases are made, write down how much was spent in the appropriate category. At the end of the budget period, total each category. Compare what you spent with what you planned to spend. If your spending was quite different from your plan, find out why so you can improve the next plan. If your plan did not provide for your family's needs, you will want to revise it. If the plan suited your needs but you had trouble sticking to it, you will want to use stricter self-discipline and better management next time. A spending plan is something you keep working and reworking until it suits your family and satisfies individual members. Do not expect to have a perfect spending plan the first time you set up one. But with each succeeding budget, you can expect improvement.
Step Six: Adjust Your Plan to ChangesAlthough you may be satisfied with your present plan, you need to change it from time to time. As circumstances change, you need to adjust your spending plan according to your new goals, needs, and resources. By thinking through your expenses, setting goals, and keeping records, you are in a better position to make revisions that reflect what is important to you and your family. There is no magic plan that guarantees financial security. And, because families have different goals, there is no single "right" way to plan. However, what you have in the future depends on what you do with your money today.
Table 1. Selected guidelines for spending
Worksheet 1Family Goals
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