Start 2012 Off Right: How to Make a Spending Plan

A brand new year is upon us. For many, a new year means resolutions that they will improve their finances. Of course, the #1 rule of personal finance is to earn more than you spend. This means that you need a good idea of how much money you are making, as well as how much you are spending.

When you create a spending plan, you can see how much money you have to work with, as well as decide where all of that money is going. A spending plan helps you direct your financial resources, providing you with a road map that (hopefully) reflect your priorities and goals.

Create a Spending Plan

When you create a spending plan, you want to make sure that you will be able to stick with it. Consider your priorities and your goals. What is most important to you right now? Do you want to pay down your credit card debt? Would you like to save more for retirement? Do you want to make sure that your mortgage is paid so that you can keep your home?

Think about the most important expenses that you have each month, from groceries, to insurance premiums, to extracurricular activities for your children, to your desire to build up an emergency fund. Rank your expenses in order of importance. Use records of past months' spending to figure out how much you are likely to spend on each item.

Once you have an idea of what you want to use your money for, and how much different items will cost each month, compare it to your income. Do you have enough coming in to cover your expenses. If not, you need to cut expenses or increase your income -- or do both things.

As part of your efforts to create a spending plan, prioritize your spending. Make sure that the most important items are taken care of first. Money toward debt repayment, paying the mortgage and buying groceries, as well as contributions to your RRSP, should be priorities. Items like eating out, buying junk food and purchasing fun new gadgets should be lower down on the list. These are items you can drop off your list in order to ensure that your expenses don't exceed your income.

Tweak Your Spending Plan

You can tweak your spending plan throughout the year. Take care of your most important priorities first, and as you pay down your obligations, you can make adjustments that allow you more "fun" money, or that allow you to boost your emergency fund savings, or switch to other expenses.

Your spending plan should be built around the items that are most important to you right now. The ability to meet your goals is vital. You will be happier with your spending plan -- and more likely to stick to it -- if you are using your money on the items that will help you reach your goals.

Image source: Ghanagogogo via Wikimedia Commons

This post was included in the Festival of Frugality at the Magical Penny, and in the Carnival of Financial Camaraderie at Boomer & Echo.