Budgeting is one of the foundations of maintaining a healthy financial life. After all, how can you tell you’re on track if you don’t know where your hard-earned paycheck is going?
That said, we fully understand how daunting it can feel to actually manage a budget. Tracking your spending, setting enough aside for a rainy day, making progress toward your long-term goals—it’s enough to make your head spin.
But what if we told you there was an easier way to manage your cash flow that didn’t require hours sifting through receipts or crunching numbers? It’s called the One-Number Strategy, and it turns budgeting into a simple-to-follow equation.
It starts with categorizing your monthly spending into four buckets:
1. Fixed costs
These include your bills that don’t fluctuate much, like your rent, a cellphone bill or your gym membership. It also includes essential costs that may change somewhat from month to month, like an electricity bill, a water bill, or other utilities (you can calculate an average for these types of costs for budgeting purposes). But generally speaking, if you can predict how much an expense will be, it belongs in this category.
2. Financial goals
These include any sort of savings or debt goal you’re trying to work toward every month, whether that’s paying off credit card balances, paying down your student loans, saving for a home or beefing up an emergency fund. This category wouldn’t include any pre-tax retirement contributions, such as what you put into a traditional 401(k), because the One-Number Strategy uses your take-home pay as the baseline for your budget. It can, however, include any post-tax retirement contributions, such as what you might contribute to an IRA.
(And just a side note here: If you do have access to a 401(k), you should consider taking advantage of it ASAP! The earlier you start saving for retirement, the more time you have for your money to grow.)
3. Nonmonthly expenses
Got a bill that you have to pay at some point every year, but just not every month? Stuff like quarterly taxes, annual insurance premiums, car registration fees or school tuition belong in this category. Tally up what those types of costs add up to each year, then divide by 12. That should be what you’re setting aside each month to cover those expenses when they come up.
4. Flexible spending
This category covers all those everyday costs that fluctuate each month. This can include groceries, take-out, shopping, movie tickets, gas—pretty much any expense that tends to vary.
The ‘One Number’ that guides your spending
So now that you’ve categorized your costs, how much can you actually spend each month without busting your budget? Well, that lies in your flex spending number, which you’ll get to with some simple subtraction.
Start with your monthly take-home pay. Then subtract your total fixed costs, your financial goal contributions, and those nonmonthly expenses you calculated. The amount that’s left over is what’s available to cover flexible spending—the daily coffees, new shoes, drugstore runs, etc. This is the One Number that you can spend however you’d like, knowing that as long as you’re sticking to it, you’re not in danger of going over budget. Divide that amount by 4.3, and you’ve given yourself a weekly flex spending number to stick to.
See? Starting—and maintaining—your budget doesn’t have to be complicated. But if you want more advice on how to manage your cash flow—or how to make adjustments to your budget if your flex spending number is not as big as you’d like—then check out our article or our video on the One-Number Strategy for further details.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.
Post by Julia Chang. This article was originally published on LearnVest.