Revised by Celia Ray Hayhoe, Ph.D, CFP®, Family Resource Management Cooperative Extension Specialist; Virginia Tech
Publication Number 354-028, Revised March 2003
The worksheets that are with this publication can be found in the PDF link at the bottom of this page.
The way you spend your money today will determine 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 for the amount of money you spend. Successful money managers control the way they spend their money. They use money to accomplish the things that are important to them. Good money managers manage their money rather than letting it dribble away from them.
Do you have control of the way you spend your money? Do you live within your income, or do you have to borrow money or use savings to meet your regular monthly expenses? Living within your income requires careful planning. It 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. There are eight steps to successful money management:
Following these eight steps will help you get control of your spending habits.
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Your business center may be elaborate or simple. The type of system doesn't matter as long as you have some way to organize your financial papers. Papers may be separated by using large envelopes or individual file folders in a file box or cabinet. Another alternative would be to use a three-ring notebook with dividers. Dividers with pockets could be used to store loose-leaf papers.
Label the dividers for your notebook or files according to the types of records you keep. For example labels might be tabbed as follows: net worth statement, record of earnings, record of expenditures, location of legal records, health records, real estate records, family papers, household inventory, employment records, automobile, housing, utilities, clothing care and information, credit card and installment payments, insurance, tax records, and general household information.
Keep supplies needed for handling your business transactions in your business center. Keep envelopes, stamps, pens, pencils, checks, and a calendar at your fingertips to speed your monthly bill paying.
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How do you set goals for how you will spend your money? The first thing you need to do is think about the things that are important to you and your family. Read over the list on the next page. Pick out the things you and your family feel are most important and place a 1 beside them. Place a 2 beside the things that are somewhat important. Place a 3 beside the things that are not very important to you and your family.
| _____ religion | _____ recreation | |
| _____ education | _____ boat, fishing equipment | |
| _____ family vacation | _____ household furnishings | |
| _____ clothes, shoes, | _____ transportation car, | |
| _____ makeup, hair care | _____ truck, cycle | |
| _____ culture (theater, movies, plays, dance, recitals) | _____ new house/condominium, apartment | |
| _____ start a new business | _____ health | |
| _____ personal appearance | _____ family activities | |
| _____ save money | _____ make lots of money | |
| _____ job success | _____ pay off debts | |
| _____ prestige | _____ jewelry | |
| _____ food | _____ attract opposite sex | |
| _____ insurance | _____ entertainment | |
| _____ friends | _____ other __________ |
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. They may not agree on what is important. Because of this lack of agreement, it is sometimes hard to decide where money will be spent.
Once you decide what is important to you, it will help you see what things you want to work toward. For example, if you placed a 1 beside a new car, your goal may be to buy a new car.
Goal setting involves more than deciding what's important to you. To help identify goals, ask yourself these questions:
When setting your goals, make a list. Take a pencil and piece of paper and write down what you want to do with your money.
Make your goals very specific. Don't say, "I want financial security." Financial security is not very specific. Ask yourself what it takes to be financially secure. Your answer might be to have $20,000 in savings when you retire in 20 years. Then you need to put $61.97 a month for 20 years in a savings account that pays 3 percent interest. Your specific goal then is to save $61.97 a month from now until you retire. This is a clearly defined goal.
Your goal should be realistic, challenging, and achievable. Is it possible for you to take $61.97 out of your monthly budget and still meet your necessary living expenses? If you can afford $62 a month your goal is realistic, challenging, and achievable. If you can only afford to save about $31 a month, then you might have to reduce your long-term goal from $20,000 to $10,000. Or you may want to look for an investment that will give you a higher rate of return than 3 percent.
Goals should be measurable and reachable within a given time period. Specify the date when you want to reach your goal. You can't put a date on reaching financial security, but you can save $20,000 if you put $61.97 each month in savings for 20 years.
Your goals should be yours. Don't let someone else set your goals for you. You will be much more likely to reach your goal if it is something you really want to do. Goals are different for each individual and family. They change as you go through the different stages of life.
Once you set your goals, picture your goals in your mind. See yourself living in that apartment. Creative daydreaming puts your goals into your subconscious mind. Once your dream is in your mind, you start thinking of ways to reach that dream. You automatically see ways to make your dream become a reality. Fix in your mind the exact things you want.
As you decide your goals, write down your short-term, intermediate, and long-term goals on Worksheet A. Short-term goals are the things you want to get done in the next week, next month, in six months, or a year. Intermediate goals are the things you want to get done in the next one to five years. Long-term goals are the things you want to do in the next five or more years.
As you list your goals, decide which goals you want to use your money for first. As you set dates for reaching your goals, ask yourself which goals are the most important and which are the least important. Here are some questions to ask yourself as you decide which goal you will work toward:
Goals are important keys to successful money management. Goals guide you so you use your money to do the things that are important to you. They can help you make your dreams come true within a specific period of time.
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Public services such as the library, cultural events, health department, parks, and transportation facilities provide services and recreation for the family at little or no cost.
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Your financial net worth is determined by subtracting all you owe (your debts) from all you own (your assets). This information will be useful when determining your insurance needs, when applying for loans, when settling a divorce, or when planning your financial future. If you need to sell some assets to get cash to pay back debts, your net worth statement will let you see what assets you have and how much they are worth. Worksheet B can be used to assist you in calculating your net worth. Listed below are some guidelines to assist you in calculating your net worth:
Your net worth gives you an overview of your overall financial standing. Use your net worth statement to help you plan for your financial future. Use it to help you identify financial goals you would like to work toward.
For insurance purposes get the appraised value of valuables in writing and ask the expert to sign the appraisal letter. These values need to be updated regularly. In addition, a general merchandise catalog can give you an estimate of the replacement value of other household items if you do not have the original sales receipts.
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Use Worksheet C to help you list your sources of income.
Calculate Your Monthly Spendable Income
Find out exactly how much money you can spend each month.
If you have an irregular income, estimate the total you expect to make for the entire year and divide by 12. Keep your estimate low. Workers such as salesmen, farmers, artists, and writers have irregular incomes.
Make a spending plan, a budget, for each month. Then when you get a check, spend it according to your budget. If you get an extra large check, stick with your original spending plan and put the extra in savings.
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After you have a written record of where all of your money is going, divide your spending into categories: fixed, flexible, and miscellaneous expenses. Spending can also be divided into daily, weekly, monthly, seasonal, or yearly expenses. Know what type of expenses you have. Know when and where you spend money so you can build a sound money management program.
Fixed expenses are the budget items you pay a specific amount of money for every month for a certain period of time. These obligations are usually enforced through a signed contract. Some examples are rent or mortgage payments, life insurance, car insurance, home insurance, and installment payments such as your car loan.
Flexible expenses are the budget items you have more control over. You decide how much you will buy and how much you will spend. Flexible expenses include food, clothing, gas, electricity, water, phone, transportation, gasoline and car maintenance, personal care, medical expenses, furnishings, household expenses, education, and professional expenses.
Miscellaneous expenses are the extra items you purchase that may not be absolutely needed. Some miscellaneous expenses are snacks, tapes and CDs, reading materials such as magazines, and recreational activities such as the theater or movies.
We're lucky that all our expenses don't have to be paid at the same time. We spend some money on a daily basis. We spend some on a monthly, quarterly, semi-annual, or annual basis. Write down when these expenses are due on Worksheet F. Then set aside enough money so you can cover an expense when it comes due.
Some examples of seasonal expenses are gifts, holiday meals, special occasions such as birthdays and anniversaries, back-to-school expenses, school trips, car repairs, property taxes, insurance (car, home, disability, life and health), license plates, and vacations and weekend trips. Monthly expenses may include house payment, car loan, and utility payments. Daily expenses include transportation and snacks.
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First, write down the amount of money you have to spend each payday.
Use the information from Worksheet E to find out your monthly expenses. Then compare them to some spending guidelines, such as those in Table 1. This table plus your record of expenses can help you decide how much to spend each month. Use Worksheet H to identify some ways to adjust your spending.
On Worksheet G, write down how much you would like to spend for each item. As you develop your plan, see if you have allowed money for the following items:
Write down how much you plan to spend throughout the pay period. Then try to stick with your plan. Remember to write down how much you spent and what you bought. Use those figures to calculate how much you actually spent. Then when you start the next pay period you can compare what you planned to spend with how much you actually spent and plan how you will spend your next pay check.
Stick to Your Spending Plan
Once you have put a dollar figure on what you will spend each pay period, what can you do to make yourself stick to your spending plan? Before you spend your next dollar ask yourself these questions:
Make your new spending plan a part of your daily life. Use it as a guide to help decide where you can cut your expenses. For example, you may want to save $50.00 on your clothing expenses and put that money into savings. Look for ways you can spend less money. Start using your spending plan today. Don't put it off until tomorrow. Tell someone else what you're trying to do, so they can encourage you along the way. Write down your new plan so it will be firmly planted in your mind.
Don't let an exception get in the way of your new spending habits. If you start taking your lunch to work so you can cut food expenses, eating out one day will discourage your new habit and keep you from reducing your food bill. Stay away from tempting situations. However, remember that changing old habits takes time. If you backslide into old habits, learn from the experience. What were the circumstances that led you to old habits? What can you do so that it does not happen again?
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Review your spending plan regularly and revise it so it works for you. Here are some questions you can ask yourself as you spend your money. Is this the best use of my money right now? Will this purchase help me reach my financial goals? Is there something else I need to use this money for? If you have trouble reaching your goals, you may want to reevaluate your goals. Are they really important to you? Is another family member or friend interfering with your ability to reach your goal? A sincere commitment and dedication to your spending plan can help you manage your money better.
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You can build a sound money management program if you
Remember, what you have in the future will depend on what you do with your money today.
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