Often we hear from people who are struggling to save; they have a strong motivation to succeed, though without fail, they find themselves skint at the end of each month regardless of how hard they have tried or how detailed their budget is.
Why? My theory is that they do not know their daily spending limits. People think they have a water tight budget, though all too often I find people spending more money than they can afford to on any given day. You may account for expenses that are big, such as car insurance, though are you fully aware of exactly how much disposable money you have left over?
In all likely hood, you are not accounting for your expenses properly, in turn the money you ‘think’ is disposable, is indeed accounted for elsewhere.
In this post you will learn how to calculate your disposable income, determine your daily spending limits and grow to have an understanding of where you leak money that will in turn identify ways to save money.
Calculating your disposable income
List your major weekly, fortnightly and monthly fixed expenses
Fixed expenses are costs that you incur, regularly, for a roughly similar or set figure. Fixed expenses may include items like monthly mobile bills, council rates per quarter, home phone bills, health insurance costs, petrol costs, grocery shopping, mortgage payments and more.
Convert your expenses to a figure in line with your pay cycle
Firstly, note when you get paid (weekly, fortnightly or monthly). The goal here is to list your expenses and what they cost you per pay cycle, not their individual due dates.
For instance, you might be paid monthly, but have a fortnightly mortgage payment. I want you to calculate your fixed expenses based on your pay period so you set aside the right amount of money each pay period, in this case the cost to pay your mortgage monthly (even though you pay fortnightly).
Example: I get paid monthly. I have fortnightly expenses. Given there are 26 fortnights in a year, I calculate the whole yearly cost of that expense, divide it by 12 months and get my monthly expense amount owed. I then set that amount aside on pay day into my expenses account and do not touch it.
Quick tip: try and setup all your expenses to come out of a single account, via direct debit, so after a few months you can get a holistic view of your finances and see any spend or expense patterns that may emerge.
You now have a sum of money that is left over
After you know how much of your pay is accounted for in fixed expenses, you are left with a leftover sum of money that is called a ‘variable expense threshold’.
This is technically known as ‘disposable income’ but we are not yet finished with ensuring this money is indeed available for spending. For now, it is simply left over money, not indeed disposable as this is where most people go wrong.
Are you confident your disposable money is actually available to spend?
It is suggested that you separate your fixed expenses from your disposable income via separate bank accounts. Once this is done, you will see the total sum you have unaccounted for.
To become confident that your new found disposable income is indeed unaccounted for and available for spend, I suggest you watch your accounts for a period of 1-2 months to see whether you have missed any expenses or once offs. In this time, try not to spend your disposable income.
While you watch your accounts, try and save at least 30-40% of your disposable income to ensure you are not short should something pop up in this ‘watching time’.
Calculate how much you can spend daily, safely
Now that you are confident in the amount of disposable income you actually have to spend, it can really help to figure out what this means on a daily basis between pay cheques.
So say you are paid fortnightly and have confidently agreed you have $400 in disposable income per pay period. That means you have $400 to spread over 14 days, a total of $28.50 you can spend each day.
This is quite eye opening for many people as they quickly realise that a single night out, could technically eat up 3-4 days of their daily spend amount. $400 may seem like a reasonable amount, and it is, however when you break it down into a daily amount, you need to be very careful of all those little things that add up to eat away at your daily amount (coffee, transport, buying lunch).
You may even decide to opt out of spending for a few days in order to spend more on a particular day (your night out).
How this will help you save money
When we deal with lump sums of money, that are to last us over a set period of time, we often lose consciousness of just how much that money is and how long we need to make it last.
Calculating your disposable income and then calculating how much you can safely spend each day will re-engage you with your money. If you know that you only have $20 to $30 per day in disposable money, and you really want to save for a holiday, how are you going to do it? You will need to ensure that you are not spending over your limit and in fact, well under it.
This way of thinking is also beneficial to helping us assess whether or not we actually need something. Do we want to spend 4 days’ worth of disposable income on a night out? Your money isn’t just a number now, it is a key to what you can and can’t (or shouldn’t) be doing given your limited funds.
Be careful however as this whole process can fly out the window if you are using credit cards to pick up the slack for your daily overspending.