Personal Financial Plans
The CT Department of Higher Education, in partnership with UConn and CPTV, has created a new online program, "Who Wants to Be Financially Responsible?" to educate students about money management in an interactive game format. Check out Episode #4: Net Worth and Budgeting for more information on this topic.
Nobody likes the word "budget," so we will call this a Personal Financial Plan, or PFP. You may make up your own fun name for it (e.g., CAR: Cash Accumulation Roadmap, WBD: Wealth Building Device, etc). The important thing to know is that a PFP is your first step to meeting your financial goals.
Why do I need a Personal Financial Plan?
Creating a Personal Financial Plan allows you to:
- ...empower yourself with knowledge
- ...take the anxiety out of money matters
- ...prevent expensive fees for overdrafts on your checking account
- ...meet your financial goals
- ...avoid the vicious cycle of debt
Those are all good reasons, right?
Developing a Personal Financial Plan
Creating a PFP is not rocket science. You can use this worksheet to help you. Here's how you start:
Step 1 - Identify your income
This is money to which you have access and may include:
- Earnings from work, including tips
-
- Use “Net" income: the amount after taxes and other deductions
- Savings you may access
- Any interest income, dividends from investments, etc.
- Monetary gifts/ financial assistance from family
- Financial aid "refund checks" which can be used for miscellaneous expenses
Many people have variable income levels, especially if they have irregular work schedules or work "on commission." For planning purposes, it is a good idea to know your average monthly income. The worksheet calculates this for you.
Step 2 - Identify your expenses
This includes everything you use money or credit to pay for (e.g., bills, spending money, etc.). Expenses can be:
- Fixed, recurring costs such as rent, car payments, student loan payments, etc.
- Variable, but recurring expenses that change somewhat from month-to-month such as groceries, gas, your electric bill, etc.
- Flexible expenses that may vary considerably in frequency and amount including:
-
- Mandatory costs such as your driver's license renewal fees, car repairs, etc.
- Discretionary spending for items like concert tickets and DVD rentals
Note: Credit card debt may be a fixed, recurring cost if you have a large balance to which you are allocating a regular monthly payment. This debt may be a flexible, variable expense if you use your credit card infrequently and/or pay off the balance in full each month (recommended).
For the purposes of filling in the worksheet for future months, estimate your variable expenses based on past months' actual expenses.
What if I don't know exactly what my expenses are?
Excellent question! If you are not sure how much you spend every month, start a "Spending Journal": Write down what you spend on everything for the next two or three months. At the end of that time, add up what you have spent within each category and use the results to complete the worksheet.
Step 3 - Compare Income and Expenses
Look at your completed worksheet. The goal of any PFP is to have income greater than your expenses. Accountants and financial planners call this being "in the black." Hopefully, you are finding yourself "in the black" at this point in the PFP process. When your income exceeds your expenses, you have many more options including:
- ...increasing minimum monthly payments on your credit cards and other debt
- ...short and long-term saving and investing
- ...discretionary spending on fun stuff (i.e., "mad money")
Being "in the red" means your expenses are exceeding your sources of income. This is a serious situation that puts many people into greater debt. If you are "in the red" at this point in the PFP process, don't despair, but realize you need to make some good decisions fast to get back into fiscal shape. Review your spending plan to figure out where you might cut some expenses or increase your income (or both). Look at the "Tips for Living on a PFP" chart below as well as the Living Expenses section for some money-saving ideas.
Step 4 - Set Priorities and Make Changes
In this stage, you identify your "Needs" versus "Wants" and prioritize your expenditures. Each month, enough savings should be set aside to cover future fixed and some flexible expenses. This reserve method will save you from living paycheck to paycheck. For more information about short and long-term financial goals, see Goal Setting and Saving and Investing.
Look at the Tips for Living on a PFP chart below for ways to save money. Refer to Living Expenses for savings ideas on mandatory expenses.
Discretionary Expenses (wants) are items that are not necessary for survival. If your expense to income ratio is out of balance and you are spending more money than you earn, items from this category should be eliminated or cut back. Brainstorm alternatives to your “wants” (e.g., make a thermos of coffee at home vs. buying Starbucks every day).
Keep track of when and how you use credit cards. If you do not pay off the balance in full each month, ask yourself if you want to borrow every month for these expenses. See Credit Cards for more information on this subject.
Step 5 - Re-Evaluating the Plan
After living on a PFP for a couple months, re-evaluate your plan by comparing your actual expenses to what you budgeted. Ask yourself:
- What worked?
- What did not work?
- What could you do differently next week/month?
- Do you need to revise your plan?
If you have left-over money at the end of each month, Congratulations! If you use it wisely (for example, putting it into a savings account), you will be on your way to building your financial independence.
If your plan does not work:
- AVOID self-defeating language (e.g., “It’s too hard,” or “I’m no good with money...”)
- DO identify areas that need revision and use positive self-talk
- e.g., “I went over my budget on clothes, but this month I will not buy clothes and will spend only $15 per week going out to make up for it.”
- Continue reworking your PFP until your income is greater than your expenses. Cut some expenses or increase your income (or both). Look at the "Tips for Living on a PFP" chart below as well as Living Expenses section for some money-saving ideas.
Tips for Living on a PFP
Instead of...
Try this...
Carrying a lot of cash around
Keep your money in the bank
- The less cash you have handy, the less tempted you will be to spend it. Try putting some money into a savings account for which you can't access the money with your debit card to make it even less tempting.
Eating at restaurants or ordering out
Learn to cook at home and bring a bag lunch to work
- Unless you’re truly a horrible cook, it’s also healthier
Treating yourself to a daily coffee/ pack of cigarettes/ drink after work
Cut down or eliminate costly habits
- Eliminating a $4 daily coffee = $1,460 saving per year!
Buying items and services simply because you saw a cool ad on TV/ online
Compare prices for everything from auto insurance to computers
- Look for bargains online including:
Making impulse purchases
When shopping for anything, make a list of what you need and stick to it!
- Use weekly sales circulars from the newspaper to plan your grocery purchases
- Leave your credit card at home
Making a purchase because all your friends are buying that jacket/ going to Cancun/ wearing solid gold sunglasses
Be willing to say, "No, I can't afford to do that."
- Many students don't have much money, but are unwilling to admit it
- Willing to be honest and live within your means sends a strong message to others that you are your own person
- Write down your long-term goals (e.g., "Finish college with less than $10,000 in student loans") and read this list every day to remind yourself why you have committed to working within your PFP
Paying interest by taking out a loan or paying by credit card
Make saving for future expenses part of your PFP so you can pay in cash
Buying items without regard to price
Clip coupons, buy off-brands, and pay attention to sales
- Saving $10 per week in groceries = $520 savings a year!
- Check out weekend coupon inserts in newspapers or online coupon outlets including:
- Consider consignment and "second-hand" stores for clothing, shoes, sports equipment, etc.
- Warning: don't buy items that you really don't need just because they are on sale!
Paying bills past the due date with added late fees
Pay all your bills on time!
- Paying on time improves your credit score too
Splurging on entertainment
Investigate economical entertainment options - Cheap does not equal boring
- Go to matinees for movies
- Look for discounts for museums, theatre tickets, etc.
- Check out local sports events (e.g., minor league baseball) with lower ticket prices
Paying for services you don't use
Buy the "basic" phone packages
- If you really won't ever use a million minutes a month, why pay for them?
Other Resources
- CashCourse Information about budgeting, financial goal setting, credit, and savings
- Spending Diary Handy application to help track spending - has reporting capabilities
