FINDING FIRM FINANCIAL FOOTING

Spending Plans

If you do not use a spending plan now, following the steps needed to make one will help you pay bills and meet family needs. If you already use a spending plan to guide your family resource management, you have a head start on managing during tough times. Your past experience will have involved seeing how family changes and emerging problems or options could be managed by taking stock of your current and near future needs and resources, and making changes in spending and goals to get the greatest return from resources you have.

Trying to hide financial problems from yourself or family members is not uncommon, but can be very destructive. Worry and stress caused by financial uncertainty and lack of cash may be worse than the financial problem itself. It's important to look realistically at your situation and actively involve members of your family in seeking solutions, despite the discomfort.

Find a quiet time and place to talk with your family about the situation. Let them know the family needs to change its spending. Involve everyone in deciding spending priorities. If family members understand the tough choices that must be made and have a voice in making the decisions, they will be more willing to accept the decisions.

As your family talks about what is most important, be sure to listen to what they say. Supporting each other can help you pull together as a family and get through these tough times.

How Other Families Handle Reduced Income

Studies show that people who manage financial stress well see the problem as short term, but they act quickly to make changes. By controlling rather than feeding the problem, they are able to feel secure more quickly. Families who do not make changes feel more out of control and more dissatisfied.

Families who manage financial stress well respond to reduced income by first cutting their spending for non-essentials such as vacations, eating out, home furnishings, and personal luxuries. They look for ways to meet basic needs at lower costs, including changing the types of foods they eat, how much they use vehicles or other transportation, and the types of medical care they use.

Fewer families who manage financial stress well report increasing their income or using more credit to manage finances during tough time. Using credit to pay bills often brings only temporary relief and usually makes them more unhappy with their financial situation.

Spending changes are shown in a revised spending plan that shows costs being cut where possible until they are sure bills can be paid.

Making a Spending Plan

A spending plan made for three to six months helps you:

• Make decisions about how to spend your money

• Provide for needs before wants

• Match your spending to your current income

• Prevent family arguments over money

The first worksheet, the Monthly Spending Plan, can help you set up a spending plan for your current income. Use a plan for each month. Tough times usually last for three to six months. Allow at least three months to find new sources of income. Assistance from outside sources to help with a temporary problem such as a natural disaster or weather related problems can be announced quickly but take several months to be set in place.

Compare your income with your planned expenses before and after your current situation. If you do not have a spending plan for past months, use receipts to make a realistic list of income and expenses. Comparing your income and planned expenses before and after your current situation can help you see changes that are needed.

Extension agents have access to a computer program, Family Spending Planner, you can use to work through different spending changes to quickly see the results you could achieve. The printout lists the percent of your income that is being spent for each type of expense. It also shows a high and low percentage range typical of families with similar family size and income. These give you clues about expenses that are on the high end of the range that might be changed without major lifestyle shifts. You can also see expenses that are already very close to the bottom end of the range, so may not be the best place to make cuts.

Step 1 - Your Income

Add up your current total family income from all sources. Include income from other family members if it is used for family expenses. Use the take-home amount, or what you actually have to spend after deductions. Do you receive income from any of these sources?

• Earnings from employed family members

• Unemployment Compensation

• Withdrawal from savings

• Tips or commissions

• Interest or dividends

• Social Security

• Child support or alimony

• Public assistance

• Veterans benefits

On the spending plan worksheet, list your income before it was reduced and the adjusted amount.

Step 2 - Your Monthly Expenses

If you had a spending plan before your income was reduced, you probably know how much you were spending for monthly expenses. If not, use old records, canceled checks, bills and receipts to figure out how much you spent on the following categories.

• Housing - mortgage or rent payments, property taxes, insurance

• Utilities - electricity, gas, phone, water, garbage, cable TV

• Food - groceries, eating out, school lunches

• Transportation - gas, car repairs and maintenance, parking, but not car payments

• Medical Care - doctor, dentist, clinic, hospital, medicine, glasses

• Credit Payments - car payments, installment loans, credit cards, charge accounts with stores

• Insurance - health, life, property, car, disability

• Household Operations and Maintenance - repairs, cleaning and laundry supplies, paper supplies, towels, equipment

• Clothing and Personal Care - new clothing purchases, dry cleaning, hair care, cosmetics, toiletries

• Education and Recreation - books, subscriptions, magazines, newspapers, lessons, tuition, hobbies, club dues, sports, pet expenses, entertainment, vacation, alcohol, tobacco

• Miscellaneous - child care, gifts, contributions, personal allowances, child support

Remember, not all of your expenses are monthly. Property taxes, insurance premiums and gifts come once, twice or periodically during the year. Graduations, birthdays and family changes may cause these to go up or down. Look ahead and plan according to your situation. It's easy to forget about them and not have money to pay for them.

Worksheet 2, Occasional and Seasonal Expenses, can help you identify and plan for these expenses. Add them up and divide by the number of months your plan covers. Divide the answer by the number of times you expect to receive income during the time covered by the plan. This is the amount you will need to set aside each time you receive income to meet these occasional costs.

As you think about what you were spending and try to plan how much you can now spend, ask these questions.

• Which expenses are essential to the family's well-being?

• Which expenses have the highest priority? Another section of this manual, Deciding Which Bills to Pay First, can help you determine this.

• Which areas can be reduced to keep family spending within its income?

• How much can you afford to spend in each category?

Adjust the amounts you spend in each expense category and enter the new amount in the column labeled "Adjusted Amount" on the spending plan worksheet.

Step 3 - Balancing Income and Expenses

Add up your adjusted expenses and compare the total to your current income. When your income is reduced, it may be very difficult to stay within your income. What can you do if your expenses are greater than your income?

• Cut spending. See the manual section, Strategies for Spending Less, for suggestions particularly for reducing flexible expenses.

• Increase your income. What are the possibilities for part-time or temporary work to help supplement your income. Use your non-dollar resources, too. See the manual section, Bartering, for ideas.

• Look at your other assets. What savings, investments or property do you have that could be used or converted to cash to meet expenses? See the manual section, Making the Most of What You Have, to help you think through your options. Keep in mind that borrowing and using savings may be only temporary solutions.

• Reduce your fixed expenses. If too much of your income is going to fixed expenses such as housing or debt payments, there may not be enough money left to cover your other living expenses. You may need to refinance your loans, move to lower-cost housing, or surrender property to the creditor to get out from under some of your debt. See manual sections on Talking With Creditors and Keeping a Roof Overhead to help you think through your options.

Making Your Spending Plan Work

Once you have a spending plan that sets spending amounts for essential family needs and balances your spending with your income, you'll have to stick to it. Writing it down is not enough. You must use the plan to guide our spending.

Keep a record of what you spend in each expense category to be sure you don't exceed the amount on your spending plan. Some families find it helpful to put the money for each expense category in envelopes marked for the type of expense the money is to cover. When something is bought, take money from the appropriate envelope and put the receipt in the envelope. Use money from an envelope other than the one set aside for the expense involved only when a major emergency occurs.

By keeping track of what you have spent, it's easier to control your spending and live within your income. When shopping, say to yourself, "I'm in control of spending. I spend according to our family spending plan."

Managing on Seasonal or Irregular Income

If you are self-employed, have seasonal income, or receive income from tips or commissions, your family income may change a lot from month to month. In that case, look ahead and carefully estimate your income. It may be helpful to estimate your income for the whole year so you can see when and how much your income and expenses change.

Even though your income may change from one month to the next, many of your living expenses are the same each month. This mismatch of income and expenses creates uncertainty that can cause feelings of insecurity and increase family tension and risks to financial security when unexpected changes happen to your income or expenses.

Reduce this uncertainty by establishing a monthly family living allowance. Use expenses you identified as part of your spending plan to determine your monthly living allowance, or what it costs your family to live each month.

When you receive income, deposit a major portion of it in a special savings or money market account where it will earn interest but still be readily available. Then, each month pay yourself by withdrawing the amount of your family living allowance and putting it into your checking account to pay your bills. Keep track of your spending to make sure you stay within your family living allowance. Avoid the temptation to spend more money in the weeks or months when your income is greater.

As a family on a seasonal or irregular income, you may want to schedule some major expenses such as insurance premiums, clothing purchases and non-emergency medical and dental care during the times when you expect more income.

Summary

Living on a reduced income may be temporary or prolonged. Getting the most from family income during this time requires careful planning and wise spending decisions.

A spending plan based on what you and your family consider to be most important can help you make spending decisions you can live with and reduce your stress..

A spending plan based on what you and your family consider to be most important can help you balance your spending with your available income and resources. Keeping track of your spending will help ensure that you have the money for the things your family needs most.

References

"Coping with Unemployment." Texas Agricultural Extension Service, 1986.

Wilhelm, M.S., Dr. R. Iams, and C. A. Ridley. Changes in consumption Management During Unemployment and Their Impact on Economic Satisfaction. University of Arizona. 1987.

Boelter, L. Managing Between Jobs - Setting Spending Priorities, University of Wisconsin - Extension, 1994.

Crawford, C. and L. E. Smith. Getting Through Tough Times - Setting Spending Priorities, University of Illinois Cooperative Extension Service, 1994.

Worksheet 1 - Monthly Spending Plan

Month ________________ 19 ____

Before Income Adjusted

Was Reduced Amount

Step 1 - Your Income (Take-home)*

Salary, wages.............................................................. $ __________ $ ____________

Unemployment Compensation................................... $ __________ $ ____________

Other........................................................................... $ __________ $ ____________

A. Total Monthly Income........................................... $ __________ $ ____________

Step 2 - Monthly Expenses

Housing - mortgage or rent payment.......................... $ __________ $ ____________

Utilities - electric, gas, phone, etc.............................. $___________ $ ____________

Food - at home and away............................................ $ __________ $ ____________

Transportation - gas, car repairs................................. $ __________ $ ____________

Medical Care - doctor, dentist, hospital...................... $ __________ $ ____________

Credit Payments - car and other loans, credit cards... $ __________ $ ____________

Insurance - life, health, car, property, house.............. $ __________ $ ____________

Household Operations and Maintenance - repairs,

cleaning, laundry supplies, etc................................... $ __________ $ ____________

Clothing and Personal Care - clothes, laundry,

toiletries, etc............................................................. $ __________ $ ____________

Education and Recreating........................................... $ __________ $ ____________

Miscellaneous - child care, gifts, allowances............. $ __________ $ ____________

Savings and/or funds set aside for seasonal

and occasional expenses............................................ $ __________ $ ____________

B. Total Monthly Expenses........................................ $ __________ $ ____________

Step 3 - Balance Income and Expenses

Total Monthly Income (A) $____________

- Total Monthly Expenses (B) $____________

= $____________

If the balance is a minus figure, less than 0, keep working together to find changes each family member is willing to make until the balance is 0 or a positive number.

*Because most bills are monthly, it's easiest to look at income and expenses on a monthly basis. Multiply weekly income by 4.33 and bi-weekly income by 2.17 to convert them to monthly amounts.

Worksheet 2 - Occasional and Seasonal Expenses

Some big expenses like property taxes and insurance premiums come due only once or twice a year. Others are seasonal, such as school clothes in the fall, holiday gifts in December and special family events and birthdays in certain months. Use this chart or a calendar to help you estimate these expenses and include them in your spending plan.

Expense Amount Expense Amount