How to Prepare a Monthly Income & Expense Plan
Effective cash management lays the foundation for financial success. After the preparation of a good monthly income and expense plan, you can make timely bill payments, preserve cash flow and put money to work within financial markets to grow additional wealth. Before putting together your monthly income and expense plan, you should identify financial goals that will serve as motivation. From there, you can better analyze your personal finances and make realistic projections. To meet your goals, you may need to limit your discretionary spending.
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Instructions
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List your financial goals. Common financial goals include building up resources to provide for start-up business costs, a first-time home purchase, tuition expenses, and eventually, retirement. While listing out your financial goals, you should also map out a timeline alongside projected costs. Perhaps you will need to save up $25,000 to put down on a home within the next year.
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With an online financial calculator, you can determine the amount of money that should be invested at a set rate of return to help put together a lump sum of cash for the future. At this point, you can begin to evaluate whether your financial goals are actually realistic.
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Review recent bank statements, investment paperwork, and pay stubs to calculate your monthly free cash flow. When calculating cash flow, you will subtract expenses away from income. Your monthly income may include employee compensation, interest earnings and dividends.
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Categorize expenses as either committed or discretionary expenses. Committed expenses, such as rent, utilities, groceries, gasoline and minimum debt payments, are necessary for survival and to help you avoid loan default. Meanwhile, discretionary spending is associated with consumer goods that do not create wealth. Consumer items include vacation packages and designer clothes.
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Minimize provisions for discretionary spending within your monthly income and expense plan. In some cases, you may need to eliminate discretionary spending altogether to meet your goals. It is possible, however, to use consumption as a motivator. Perhaps you can treat yourself to a Miami vacation, after paying off all credit card debt and saving up six months worth of committed expenses in cash reserves.
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Analyze the costs and benefits of a lifestyle change that may significantly reduce your committed expenses. Perhaps you would be willing to take on the moving costs of moving into a smaller apartment---if you can save $300 in rent each month.
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Calculate a new monthly free cash flow figure that takes discretionary spending cuts and lifestyle changes into account.
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Spend free cash flow to pay off debt and establish six months worth of committed expenses in cash reserves. You will prioritize your debt payments according to interest rates. Make minimum payments on low-interest rate debt, so that you can aggressively eliminate expensive credit card balances.
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Put money into investment accounts. As a beginning investor, you can purchase mutual fund shares for as little as $50 per month.
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