Meeting ends or money well spent?

Most of us start our financial journey and earning first regular money by getting  a job. This means you don’t need to rely on others to support you anymore.  Being self-sustainable is generally considered as a part of the transition into adulthood.

When your income covers your expenses, you are at the stage of financial solvency.  At this moment you are not accumulating debt or living beyond your means.

Naturally there are two way to achieve solvency. Raising wage to meet expenses or budgeting our expenses below what we earn. (As a side note you might be intereseted how your income compares to others and can do so at The Global Rich List. You might be suprised where you stand from the global perspective.) As there can be no limit to spending anything, priority  is to limit expenses. To budget them and spend accordingly.

Unless you are in a phase of a major life shift, you can start budgeting expenses by acquiring data on past expenses, say for the past twelve months as this will include expenses with different period of occurence (monthly utility bills, yearly insurance costs, etc).  Review them and sum them up in categories like housing, food, transport, etc.  Keep number of categories at or below 7 as going too much in detail will be pushing your memory and possibly avert you from keeping track.  Just file everything else into »Other expenses« . This helps you see where you were spending your money and sets you with a baseline.

To develop future budget use the baseline and  accommodate for planned changes (e.g. moving into new appartment with different cost of rent, having kids,  deciding to spend less on clothing, etc.).  Importantly leave some slack for unplanned expenses if you can, to give you some breathing space.

As you budget expenses be aware of the two types of expenses. On one hand are the so called fixed expenses like rent and utility bills. They are generally hard to change and occur quite regularly.

What income is left after  covering the fixed expenses is disposable money. This is then used to cover variable expenses that you choose with greater freedom what they will be, like preparing most of your food at home versus more expensive eating out, spending more or less on clothing, transport, etc.

Planning your budget to reflect your values and goals will lead to a happier life. You’ll be spending your money for thing you care most about. With that said, usually highest budget expenses are for housing and transport. While generally there is no rule upfront on what to spend certain percentage of income on, it is good to realize that these categories  will hugely impact your life and keeping these two budget categories on a level, will release big amounts of income as disposable for perhaps more important goals. These two categories are usually first targets when people are in need to scale down expenses.

With budget planned it’s time to start tracking expenses and keep then in line. While wildly popular tools are available (web services and mobile apps like Toshl, Mint, mobile banking apps, etc) , just keeping a simple spreadsheet could do and might actually even be easier at first to suit your style of keeping track.  Some exaples are available at Wikihow.

Spending on par with earnings will keep you solvent, that is able to meet your financial obligations,  but spending below your earnings will lead towards next stages of financial independence and with it greater freedom.