MICHELLE SMALENBERGER, CFP ®
[Video] Calculate Your Spending Without A Budget
Let’s talk about something that most people like to do – Spend money. Let’s also talk about something not everyone wants to do – keep a budget…
If I were to ask you this question, “How much do you spend?” Would you be able to answer it? And how you answer it will really affect if this video is helpful for you.
“I Don’t Keep A Detailed Track Of What I’m Spending Each Month”
For example, let’s look at a person who doesn’t like to keep a budget or track how much is spent each month.
If this is you, you’d say, “I don’t really know what I’m spending to a tee each month”. Here’s the short formula: Gross Income – Net Income – Expenses = Livable Income
You want to start with your income, and this is whatever is coming in from your paycheck.
Now one word that you might have heard before is your gross income. Gross income is just the total of everything that you earn. Your gross income now looks like your paycheck. We started to take out retirement savings, your 401K, taxes, employee benefits, etc.
This all comes down to what you take home. This is known as your net income. This is the money that gets deposited into your bank account. And this could be where we start of all of your expenses, because you could just say “At the end of each year my total income is a $100,000”.
Net Income Expensing
Let’s just say “your putting $10,000 into my retirement plan and I’m paying $25,000 in taxes.” If everything goes out at the end of the day, and there’s nothing left in our account, then our total expenses are $65,000. Then you can break it down, just very generally, into some big categories.
Scheduled Expenses: mortgage, other debt, credit card, auto loan.
It’s important to know these. I’m going to explain why next, but these are things that you can expect every month.
Unscheduled Expenses: clothes, groceries, lifestyle expenses
Next is unscheduled expenses that you might not keep track of. These make up what we call your lifestyle expenses. It’s important to break these out, or just generally, know what these are because these expenses typically end at retirement.
So once you retire, you don’t have taxes coming from a paycheck. You also don’t have money going into your retirement savings. You may not have employee benefits, but you do have a mortgage and debt.
These are the expenses you will still have when you’re in retirement. You have to know if you’ll have money to pay for what you need to spend in the future. This is why tracking your expenses in a really quick way – even if your not track it all the time – you can come back to these numbers to understand what you’re spending.
This is a really important piece of what we provide as financial advisors. Our role isn’t to tell you what to spend your money on. Let’s have a discussion to understand what your retirement lifestyle expenses are going to be.
If you do this at some level throughout your life, it will really help you when you’re in retirement. Hopefully this is helpful and even if you’re not a budget-er, or someone who tracks your expenses, you can know and can be able to answer this question “How much do you spend?”
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This was such a great analogy on how to grow finances. In gardening and finances there is a natural order of how things get taken care of.
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