This month’s post is the second installment of the “Cash Flow Blues” trilogy. If you didn’t catch episode one, read it here.
If you followed the exercise from last month’s post, you have a good idea of your average monthly income and expenses. So, what do you do with this info?
Let’s focus on expenses. Each category of expenses you identified can generally be described as ‘necessary’ or ‘discretionary’.
Necessary expenses provide a minimum lifestyle and are tougher to change. Think rent/mortgage, groceries, utilities, some auto expenses, insurance, medical, etc.
Discretionary expenses are more variable and flexible. Think dining out, travel, entertainment, etc. Do not read discretionary as “unnecessary.”
For the expenses deemed ‘necessary,’ add up all the monthly averages. This total gives you a baseline of how much income you need each month. Hopefully, your average monthly income covers these baseline expenses.
So what’s left of your income after necessary expenses?
How much do you want to save each month? List your savings goals. Assign a monthly dollar amount to each. Add that to your necessary expenses.
Now how much of your income is left for discretionary spending? Is there enough left to cover all discretionary spending?
If your remaining income doesn’t cover your past discretionary spending habits, this is where you start trimming your spending to make your expenses fit your income.
Notice the order I asked these questions. Carving up the available income – first necessary, second savings, third discretionary. This is the mental shift that you need to make for this system to work.
Not the most revolutionary idea, sure. And all of this sounds great on paper, but implementation can be a bear.
Read on to the next article where I share ‘insanely clever hacks’ to help you implement this new mental shift.
I don’t provide financial planning or investment advice. I won’t make any recommendations as to which savings goals are best for you or how much you need to be saving. I won’t provide recommendations as to the purchase or sale of securities. The content of this article is for entertainment purposes only. Cuz’ aren’t you having fun right now?