What do you actually have to spend per day?
Budgeting is about more than accounting for the big expenses. It’s about anticipating your desires for daily coffee, about figuring out whether you can afford that movie, about looking at your expenses and about calculating your disposable income.
So how do you know how to figure this out? You look for your total level of expendable income, a daily spending limit for yourself.
How to calculate a disposable income
Step 1) List all of the expenses that need to be included
This is the first step to any budget, figure out your expenses. Be thorough here! Start with the big monthly bills, then move to your biweekly payments, and finish up with your weekly costs (fuel, grocery, etc.).
Step 2) Add your expenses and figure out how much of each wage should be dedicated to them
People often overlook this step. Factor in whether you get paid bi-weekly, monthly, or weekly, and calculate how much of each wage needs to be set aside to ensure that each and every expense is covered.
Most of my expenses are biweekly, though my pay only occurs monthly. To budget for this, I multiply my expenses by 26 (the number of bi-weekly periods in a year) and then divide it by 12 (the number of months in a year/occurrence of my pay) to figure out how much I need to set aside from each wage to fully cover all of my expenses.
Once this number is figured out, consider where you’ll set the money aside. Most people prefer separate bank accounts for expenses versus disposable incomes or savings, as this simplifies keeping spending and expenses separate.
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Step 3) Take a look at the leftover amounts
Now that you know what needs to be set aside from each wage, in theory, you have what’s leftover from each wage. This is the leftover cash, and this is where a lot of people stop budgeting – a critical error in judgment. Just because you don’t have any planned expenses for the year left does not mean that there are no expenses left to account for.
First of all, try out your budget as it stands for the next 2 months. This will give you some time to try out your budget, and ensure that you’re correct about your expenses. During this time, save at least 30% of the ‘leftover’ money, to prepare in case you’ve miscalculated something or an unexpected expense comes up.
Step 4) Complete the analysis by evaluating your income
Now that you’ve had a few months with your expenses figured out, you’ve confirmed how much of each wage is actually ‘leftover’ or disposable. Now that you have this figure, you can figure out how much this works out to spending per day, and that’s your disposable income.
How this helps
You now have a reliable way to completely analyse your spending. You will know when you’ve spent “too much” or when you can afford to save. It really breaks down the spending to help people figure out whether or not they can afford that coffee today, or whether it is a good day to eat out.
This also helps you to save, as you can now save as much (or as little) of that income as you want. Think about your savings goals and make sure you’ve factored those costs into your daily disposable income.