Creating a spending plan often focuses on balancing money coming in and going out of the household. Sandra McKinnon, a human sciences specialist with Iowa State University Extension and Outreach, offers another approach: Besides looking at the dollars, also consider the hours.
"When we look at dollars, if we have $3,000 in monthly income, then we only have $3,000 to spend, save and share," said McKinnon, who specializes in family wellbeing. "Saving includes goals we are working toward, like retirement, children's education, a vacation or a kitchen remodel. But we also need to set aside money for those bills that only come up a few times a year, like auto insurance or property taxes, so we have the money available when that bill comes due."
Often, people do not know how much they really spend, especially the out-of-pocket expenditures like eating out or the quick stop before work for a cup of coffee, McKinnon said.
"This type of spending can really add up to more than we realize. For example, a soda pop at $1.60 each day adds up to $584 in a year. Tracking where our money goes for a month or two gives us real numbers to work with in a spending plan," McKinnon said.
Here's another way to put together a realistic spending plan. Before spending money, rather than focus solely on the dollars, also think in terms of hours worked.
"Budgeting based on hours worked means figuring out how many hours we would have to work to pay for an expense," McKinnon said. "If we ask ourselves, -- 'Do I work enough hours to buy this item?' -- then we might pause for a moment and really consider that cost. Would we spend differently?"
For example, Ben wants to buy a new recliner that is on sale for $300, so he decides to figure out how many hours he'd have to work to pay for it. He clears $20 an hour and works full-time, about 160 hours in an average month. He would need to work 15 hours to be able to buy the recliner. He decides to pause for a moment and really consider whether he can afford the recliner's cost.
Ben has to work 37.5 hours to pay his $750 monthly rent. That's almost a week's work! He tracked his food expenses and, although he rarely goes out to eat, discovered he has to work 11.5 hours each month to cover his food expenses. So, he has 111 hours left to pay for utilities, goals, clothing, car maintenance and any other expenses.
Ben doesn't have enough extra money in his savings account to buy the recliner. He is still working on building up an emergency fund and that expense comes first. He could use a credit card to purchase the recliner but the money needs to come from somewhere when the bill comes due. He needs to keep in mind as well, the recliner will cost him even more hours worked if he does not pay the credit card bill in full when it is due. Ben decides not to buy the recliner.
"We work hard for our money and our money only goes so far. When we consider hours worked and pause before spending, we gain more information to decide what works for our budget," McKinnon said.
Iowans can get help with setting up a budget. Free financial education consultations are available to all Iowa residents from ISU Extension and Outreach's human sciences specialists. Contact Iowa Concern at 800-447-1985 and ask for free financial education consultations.
Family finance information also is available from ISU Extension and Outreach's MoneyTip$ blog.
Categories: Iowa, General