Do you have a spending plan?
A spending plan keeps your money in a tight rein if properly monitored, much like the budgeting and control processes in the corporate world.
LAURA felt something unusual in the behavior of her husband as he seemed restless. It turned out that Brent was having breathing difficulties so he was rushed to the nearest hospital. Upon diagnosis and further laboratory tests, he was recommended for heart bypass operation. Brent stayed in the hospital for one month and three weeks but was not able to survive the quadruple bypass operations due to complications despite having a team of 17 specialist doctors around him. The bill reached several millions of pesos. He was finally laid to rest a few days ago and left four young kids. How will a bereaved widow like Laura, cope with the financial consequences of losing a spouse? After settling the final expenses, delving into melancholy mood for a period of time, she will eventually have to move on to a new phase of her life as a single parent. Life goes on. To manage expenses, the most practical thing to do is to come up with a spending plan.
This applies to dual-income families, as well as single people. The difference for dual or multiple income families is the advantage of pooling the resources of family members earning income to share in common expenses and financial objectives.
A spending plan keeps your money in a tight rein if properly monitored, much like the budgeting and control processes in the corporate world. It necessitates a forethought compared to the common practice of just listing down expenses as they are incurred. In fact, most people spend whatever money is available and borrow before the next paycheck arrives. Creating a spending plan is a way to manage your personal finance.
In a previous column, Managing Household Finances (July 8, 2014), we have learned that expenses maybe classified into non discretionary (fixed) expenses and discretionary (variable) expenses. After tracking three months of your expenses, getting the average monthly figures will help you pinpoint how much you have been spending per item.
The next step is to write down your short-term, medium-term and long-term financial objectives. Short-term goals may be defined as those which you plan to materialize in one year or less, medium term for those between one to five years and, long-term goals for those funds needed beyond 10 years. Here is a sample tool which you can use to set your financial goals in writing and review them periodically:
After completing your financial-goals worksheet, review the summary of your household expenses for the previous months, you should be able to realize which of your current expenses do not contribute to your financial goals. With this in mind, you can start minimizing or deleting unnecessary expenses and come up with the right spending plan for each category of expenses.
Aside from this, you need to allocate amounts to be set aside from your income sources to help you reach your written financial goals. You may need the assistance of a financial planner to help you realign your resources to maximize the returns of medium and long-term financial objectives instead of putting all of them in several low-interest bearing demand deposit banking instruments. The asset allocation refers to the recommended optimal mix of varying financial instruments after determining the disposable income for savings and investments. For example, for the college education of one child, you can allocate 80-percent growth fund, 20-percent balanced fund. Then change the mix as the college years comes nearer. Bear in mind also that you need to continuously replenish your emergency fund (See June 16, 2014 column, “Is your Emergency Fund Enough?”).
There is a need to periodically monitor your spending plan to see the variance and adjust your expenses accordingly. If you are unable to adjust expenses, you may have to look for additional sources of income to augment current sources. In this way, you can be on track to reach your financial goals. You may consider a financial planner to assist you in calibrating and recommending proper financial instruments to help you reach your goals in the desired time frame.
Regardless of setbacks that happen in our life, life goes on. We have the responsibility to take care of our personal finances. It is up to us to harness the courage to face the daily challenges, for God has a plan for each one of us . In Jeremiah 29:11, it says “For I know the plans I have for you,” declares the Lord, “plans to prosper you and not to harm you, plans to give you hope and a future.”
Arlyn Cheng is a Registered Financial Planner of RFP Philippines. She is a Financial Advisor of a leading insurance company in the Philippines.
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