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Show Me the Money Lesson 1: Your Financial Action Plan1
Adapted by Josephine Turner 2This document is best viewed as a PDF. Click here to access the PDF.
Overview
Families today are faced with a financial puzzle. In addition to stretching their income from one paycheck to the next, they face the necessary task of planning for future financial needs. It is easy to get caught up in everyday living, forgetting to look ahead. But a secure financial future requires setting goals and carefully managing your money so goals can be met.This lesson is designed to help you and your family create a financial action plan that will enable you to make wise decisions now about your future financial success. When you have completed this lesson, you will have:
The lesson ends with a brief introduction to developing a savings plan, which is discussed further in Lesson 5 . After completing this lesson and the accompanying worksheets, you should be well on your way to understanding your spending patterns, so that you can take control of them and your future.
- assessed your family's values;
- learned how to set and reach specific spending goals; and
- identified your income and spending patterns with an eye towards developing a budget.
What's Important to You?
Before you can make your financial dreams come true, you need to think about what things are important to you and your family. The values you identify will help you to determine the direction you take with your finances. The following list identifies some things that are important to families. Pick out the things that are most important to you and your family and place a "1" beside them. Place a "2" by the things that are sort of important. Place a "3" beside the things that aren't very important.
_____religionNow compare your list with your checkbook or spending receipts. Are you spending money on things that are really important to you and your family?
_____education
_____food recreation
_____insurance
_____friends
_____health
_____culture (theater, movies, dance recitals)
_____household furnishings
_____personal appearance (clothes, shoes, hair)
_____job success
_____prestige family vacation
_____making lots of money
_____starting a new business
_____family activities
_____paying off debts
_____entertainment
_____new home or condominium
_____transportation (car, boat, fishing equip., truck)
_____other:_____________________________Do you and your family agree on your spending values? It's hard enough for one person to decide which item is most important. It's even harder when two or more people who share money have to decide where the money should go. That is why it is important for all family members to openly communicate about their spending priorities. Communication and joint decision-making are especially important regarding your family's budget, savings, and use of credit.
Financial Forecasting
You need to look into the future and see where you want to be before you can get there. Create a list of your family's financial goals. It might look something like this:
Financial goals should identify what you want to do with your money within a given period of time. Goals give you direction. They give you a purpose for the way you spend your money. Think about the things you want your money to do for you now and in the future. Think about your short-term, intermediate, and long-term goals.
- home ownership
- higher education for yourself and/or your children
- cash reserve for emergencies (equal to three to six months take-home pay) in case of unemployment, illness, or family emergency
- decreased debt load
- reserve money for special needs (house down payment, house remodeling, family vacations, braces for children)
- adequate insurance against loss
- retirement income
Short-term goals are the things you want to get done in the next day, week, month, 6 months, or year. Intermediate goals are the things you want to accomplish in the next 1 to 5 years. Long-term goals are the things you want to accomplish in more than 5 years. All goals should:
What constitutes a goal? A statement such as "I want to save money" is too vague. It becomes a realistic financial goal by adding a dollar amount, for instance, "I want to save $25 a week for 12 months." An actual goal, however, would depend on an individual's or family's income and values. Use Worksheet 1 to help you and your family decide what your financial goals are.
- be specific
- be realistic, challenging, and achievable
- be measurable
- have a target deadline for completion
- be your/the family's
Income and Spending Analysis (Cash Flow)
After you have listed your goals, you may question if it is possible to realize any of them and still pay day-to-day bills. To answer that question, you need to know your family's cash flow.Your cash flow is the flow of money into your pocket and out again. How well do your income and expenses match? That sounds simple, but few of us take time to see what comes in and goes out each month.
Use the "Cash Flow Worksheet" (Worksheet 2) to list your income and your expenses for 1 month. List all of your monthly income; include your salary, tips, child support, alimony, tax refund, dividends, interest from investment or savings accounts, capital gains from investment sales, and income for rental property or royalties.
Also keep a record of your expenses for the month. Use check stubs and receipts to monitor your spending. Include your fixed and flexible expenses. Fixed expenses are rent or mortgage payments, installment loans, insurance payments, and other regular payments. Flexible expenses are the budget items you have more control over. These include food, clothing, entertainment, utilities, etc.
When income exceeds expenses, you will have money to put in your savings program. If your income does not exceed expenses, see what you can do to increase your income or decrease your expenses. Look at your budget to see if you can eliminate some expenses. Perhaps you can reduce your flexible expenses?
Plan your Spending
The key to financial comfort and future financial success is budgeting. With just a few months of disciplined spending, you can reverse overspending, free extra money for savings and investments, and build a cash cushion for emergencies.A budget is a boundary for your spending. When you allow $73 a week for food, you have set a spending boundary. A complete budget is a spending guideline.
Spending Guidelines
Spending guideline percentages may be useful when you examine your spending patterns. Spending guidelines are for comparison purposes only. They are not hard and fast rules. One family may choose to spend 40 percent on housing and less on clothing, credit, and transportation, while another may choose to spend more on transportation and less on housing. Here are some common spending guidelines:
Housing (utilities and supplies) 33-35%Necessary living expenses (shelter, food, clothing, and transportation) account for approximately three-fourths of take-home pay. A complete spending guideline will account for 100 percent of your income, regardless of how it is subdivided.
Food 18-25%
Transportation (gas, oil, fares, passes) 7-9%
Clothing 6-12%
Medical (dental, prescriptions, health ins.) 6-8%
Auto insurance 2-3%
Life insurance 2-5%
Credit obligation (auto payment) 12-15%
Savings 2-10%
Recreation/entertainment 2-10%
Religious donations/charities 2-10%You can compare your take-home pay to a pie. If you cut one slice too big, all the other pieces will have to be cut smaller or else you will have to borrow to make ends meet.
How to Make a Budget
Do you have a written plan that guides your spending? If not, use Worksheet 3 or the money management calendar to plan a monthly budget. List what you plan to spend as well as what you actually spent. Use check stubs and receipts to verify your spending. As you develop your plan, see if you have allowed enough money for the following items that pertain to you:
- Major expenses. Future goals such as adding rooms to your home, buying a car, paying for your child's education, gifts or furniture.
- Emergencies. Unavoidable costs such as tires, medical expenses, auto accidents, unemployment, car repairs, dental bills, house repair, and appliance repairs.
- Irregular expenses. Occurring annually or more often, such as school supplies and clothes; house, car, health, life, and disability insurance; registration fees for children in groups such as football, baseball, and basketball leagues; family vacations; birthday and holiday gifts; taxes and license plates.
- Debts. Such as past-due bills and credit card debts.
- Monthly expenses. Basics such as savings or investment, rent or mortgage, utilities, household supplies, food, contributions, installment payments, and medicine.
- Daily expenses: school lunch, snacks, transportation, and meals out.
- Miscellaneous expenses: dues, subscriptions, laundry, clothing purchases and repairs, movies, recreation, and personal care.
Plan for Savings
When making your budget it is a good idea to plan for savings first. You can grow richer each month if you pay yourself a regular amount first. For instance, each month before you pay your bills, put 10 percent of your gross pay into your savings fund. If you do this at the beginning of the month, your entire paycheck will not slip through your fingers. But, if you wait until the end of the month, there may not be anything left to save.Paying yourself first gives you an automatic, systematic way to make your money grow. Regardless of your occupation or your income, this system works. This type of monthly deposit can also be accomplished through a payroll deduction. Check with your employer to see if such a plan is available where you work.
Another option to consider is putting a portion of a pay raise into a savings account. Also, you can empty your change into a can at the end of every day. Then at the end of the month, roll the coins and put them in your savings account. Some save up to $30 a month this way. Lesson 5 offers more information on options for savings and investments.
Review for Spending
After establishing a plan for spending and saving, you need to carry it out. Keep track of your expenses to see that you remain within the plan. If not, or if you have unplanned expenditures, be prepared to make adjustments.If you spend more than you earn, you must either increase your income or decrease your expenditures.
Summary of Suggested Activities to Start Your Financial Action Plan
Schedule a family get-together. Have each person write down one specific spending goal. Then, select a family goal for this year. Discuss a plan for reaching each goal.
- Identify your total monthly income.
- Keep a record of all your spending for a month.
- Develop a spending plan for the year and stick to it.
Tables
Worksheet 1
Family Goals
Briefly describe your goals
Goal
Total Cost
Cost per month
Target date for goal completion
Short-term (within the next 12 months)
Intermediate (1 to 5 years)
Long-term (more than 5 years)
Worksheet 2
Cash Flow Worksheet
Month__________________Year________
Income
Amount $
Salary and tips
_______________________________________
Interest, dividends, pensions
_______________________________________
Child support
_______________________________________
Other:
_______________________________________
Expenses
Amount $
Rent or mortgage
_______________________________________
Utilities (telephone, water, electricity, cable, internet, gas)
_______________________________________
Food
_______________________________________
Transportation
_______________________________________
Clothing
_______________________________________
Medical
_______________________________________
Insurance
_______________________________________
Education
_______________________________________
Child care
_______________________________________
Credit
_______________________________________
Savings
_______________________________________
Recreation/entertainment/cable/membership dues
_______________________________________
Religious donations/charities
_______________________________________
Other____________________________________
_______________________________________
Total monthly expenses
$
Income less expenses
$
Worksheet 3 (page 1 of 2)
Yearly Plan and Spending Chart
Month Amount of Income
January
February
March
April
May
June
Expenses
Plan
Spent
Plan
Spent
Plan
Spent
Plan
Spent
Plan
Spent
Plan
Spent
Alimony/child support
Business expenses
Child care
Clothing
- Laundry/dry cleaning
Contributions
Education, self-improvement
Food & groceries
- Alcohol & tobacco
- Meals eaten out
Gifts
Hair care/cuts
Home furnishings, equipment
Household maintenance/help
Insurance
-Automobile
-Disability
-Home
-Life
-Medical
-Property
Medical - Dentist
-Physician
-Prescriptions
-Other
Miscellaneous
Monthly bills
-Auto payment
-Bank credit cards
-Cable TV
-Department stores
-Loans
-Rent or mortgage
-Spa & health club
-Other
Pets
Recreation/entertainment
Savings, investments
Transportation - bus, taxi
-Gas
-Vehicle maintenance
Utilities
-Electricity
-Garbage
-Gas or other heating fuel
-Telephone
-Water & sewer
-Other
TOTAL EXPENSES
Income less expenses
Worksheet 3 (page 2 of 2)
Yearly Plan and Spending Chart
Month Amount of Income
July
August
September
October
November
December
Expenses
Plan
Spent
Plan
Spent
Plan
Spent
Plan
Spent
Plan
Spent
Plan
Spent
Alimony/child support
Business expenses
Child care
Clothing
- Laundry/dry cleaning
Contributions
Education, self-improvement
Food & groceries
- Alcohol & tobacco
- Meals eaten out
Gifts
Hair care/cuts
Home furnishings, equipment
Household maintenance/help
Insurance
-Automobile
-Disability
-Home
-Life
-Medical
-Property
Medical - Dentist
-Physician
-Prescriptions
-Other
Miscellaneous
Monthly bills
-Auto payment
-Bank credit cards
-Cable TV
-Department stores
-Loans
-Rent or mortgage
-Spa & health club
-Other
Pets
Recreation/entertainment
Savings, investments
Transportation - bus, taxi
-Gas
-Vehicle maintenance
Utilities
-Electricity
-Garbage
-Gas or other heating fuel
-Telephone
-Water & sewer
-Other
TOTAL EXPENSES
Income less expenses
Footnotes
1. This document is FCS5204, one of a series of the Department of Family, Youth and Community Sciences, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Original publication date July 23, 2001. Revised October 25, 2005. Visit the EDIS Web Site at http://edis.ifas.ufl.edu.2. Josephine Turner, Ph.D., CFP, professor, Family and Consumer Economics, Department of Family, Youth and Community Sciences Department, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL 32611.
The Institute of Food and Agricultural Sciences (IFAS) is an Equal Opportunity Institution authorized to provide research, educational information and other services only to individuals and institutions that function with non-discrimination with respect to race, creed, color, religion, age, disability, sex, sexual orientation, marital status, national origin, political opinions or affiliations. For more information on obtaining other extension publications, contact your county Cooperative Extension service.
U.S. Department of Agriculture, Cooperative Extension Service, University of Florida, IFAS, Florida A. & M. University Cooperative Extension Program, and Boards of County Commissioners Cooperating. Larry Arrington, Dean.
Copyright Information
This document is copyrighted by the University of Florida, Institute of Food and Agricultural Sciences (UF/IFAS) for the people of the State of Florida. UF/IFAS retains all rights under all conventions, but permits free reproduction by all agents and offices of the Cooperative Extension Service and the people of the State of Florida. Permission is granted to others to use these materials in part or in full for educational purposes, provided that full credit is given to the UF/IFAS, citing the publication, its source, and date of publication.