Excerpted from: The NCFE's Home Study Course "Spending & Savings Techniques for the 1990s".
In preparation for setting up a spending-plan, list on a separate sheet of paper all sources of monthly income including gifts, bonuses, tax refunds, cost of living increases, dividends and interest income, etc. Note the frequency of each source. Total-up all sources of monthly income.
On separate sheets, list all monthly expenses. Expenses are separated into two categories: fixed and flexible.
A fixed expense is one that remains the same each month such as a mortgage or rent, a loan payment, insurance premiums, an amount of money set aside each month for such things as gifts, motor vehicle maintenance or clothing and uniforms, for example. Total-up fixed expenses.
Flexible expenses are those which are directly controlled. These include household and grocery items, utilities, entertainment, meals away from home, out of pocket expenses, etc. Total-up flexible expenses.
All expenses are totaled and then subtracted from the total income figure for the month. Next, divide total expenses by the frequency of income or the number of paychecks the household receives each month. This tells you how much to set aside from each paycheck . (Note: If the expense total is greater than the income total, you are out of kilter financially. Begin to prioritize expenses by noting every expense for which credit will be utilized in order to keep in the plan. Then ask yourself if you want to borrow every month for these expenses.)
Enough money to cover fixed and some flexible expenses from each income period should be kept in reserve in a special expense account. This reserve method for expenses from each income period is utilized to avoid the paycheck to paycheck routine. Don't take the reserve expense checkbook shopping. Review the spending-plan each income period and up-date year-long spending plans quarterly.
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