Currently in your fixed expenses and your debt payments you have tied up future income to pay those expenses. Take the total inflow and subtract these fixed expenses and debt payments. The difference is disposable cash that you have some options of how to spend.
The first step in determining how to spend your disposable cash is to plan for those necessities that are in the variable expenses. These are necessities that you can adjust the amount that you decide to spend; you will however need to spend something on these.
For example, consider holiday expenses. If you want to be able to spend $1200 a year on holidays, we recommend setting up a savings account to put $100 a month away so that you have the funds when the time comes. You should be putting something away in a savings account for unexpected events – car or home repairs, unexpected medical expenses, an unplanned trip home due to a death, a shortfall in your paycheck due to unpaid sick time or any number of emergency or unplanned expenses. Our recommendation is an emergency savings account that contains a minimum of 25% of your annual income. Ideally, you will fund your vacation before you take it. What is the general cost of a vacation for you? Take that amount and divide it by the number of paychecks that you have per year and put that into a vacation savings account.
Work through all your variable expenses. Determine which ones that you need to plan for over a longer term and consider creating savings accounts for each of those expenses. Fund them regularly each time you get a paycheck, preferably as an automatic transfer rather than something that you must think about doing. This is the “pay yourself first” system.
For the shorter-term expenses, you need to develop a system to make sure you stay within the dollar amount that you allocate for each expense type. This might be your grandmother’s old envelope system. This might be a software program that can be used on your computer or an app that is available on your smart phone.
We will discuss these more in future posts.