If I were to ask you how much of your 30-day income is spent before you even receive it, in percentage terms, what would you say? 30%? Maybe 40% during a busy month? The truth is, the national average is approximately 60% – just on fixed expenses (this doesn’t include anything outside of your basic needs – shelter/food/transportation), and you may not be as far behind as you think. With 39% of Canadians already feeling overwhelmed by debt, and 48% reportedly $200 away each month from being unable to afford all of their bills, some serious work must be done.
So you may ask then, what am I to do when a majority of my expenses are already locked in, and I can’t help but to go out and socialize every weekend? It’s quite simple really. All that needs to be done is a bit of planning – it will offer you some insight into your current situation and answer any questions you may have.
The 30-day calculation is my interpretation of the more commonly known 90-day calculation, in which you calculate all of your fixed expenses (and approximate your variable ones) for the next 90-day period and see how the total expenditures stack up against your 90-day income. If you end up in a negative, it’s quite clear that things need to change.
The reason I’ve adjusted the length is that a 90-day period seems unrealistic, a lot of things can go wrong (or right) over 3 months and so the predictions will be way off the mark more often than not. A concise, 30-day period offers a little bit more stability, we can be quite confident that you will receive 2 paycheques (or 4, or 30, depending on how you elect to get paid) and we can then stack those up against your expenses, both fixed and variable, for the month.
This will give a monthly float level, bringing to light any additional funds/debts that are currently built into your spending habits. You can then decide what to do with the results.
The 30-day calculation is important not because it shows you how much money you are pocketing/short on a monthly basis, but because it allows you to formulate a proper action plan. If you can see that given your predictions you’re going to be net positive $600 this month, put the money aside for your investment accounts, pay down debts, or position it towards some other valuable area of your life – don’t let it slip through your fingers on lattes and avocado toast.
Similarly, if you find that you’re net negative $600 this month, it may be time to seriously reconsider your fixed costs (i.e. phone bill, car payments, groceries), and if those seem rather strapped, you’re going to need to seriously re-evaluate your variable expenses. Although tough to start, laying low for the next few weeks/months in an effort to balance your books will be of massive value.
With the idea of balancing your books also comes the opportunity to increase your income, having the same impact but in a more sustainable, growth-oriented manner. As he read over the early drafts of this article, a good friend of mine brought up the point that people can only do so much to decrease their expenses – the more you cut the more difficult it becomes to cut further. However, taking on more responsibility at work, putting in extra hours, finding a side job, or monetizing your hobbies are all ways to balance your books from the opposite direction. The more you earn, the easier it becomes to earn more. Ideally, you’d like to cut your expenses a little and increase your income a little, let the two of them work as the yin and yang of your finances. Take a portion of your Netflix loafting time and turn it into money making time – every little bit helps when you’re reshaping your finances.
Although rather self-explanatory, I’ve decided to include a mock 30-day calculation below to give you an idea of what it should look like.
Note a few things in the above calculation. All of the monthly expenses (both fixed and variable) are approximated and should be calculated as close to your real expenses as you can – try and base the numbers on past months/spending expectations. The $800 in savings is because you should be trying to set aside 20% of your net income each month ($4,000 x 0.20 = $800) at the minimum and therefore that doesn’t belong in your cash float, it’s set aside the same way money for expenses are. Setting aside a portion of each paycheque eliminates the desire to spend money that should otherwise be put away for the future. Paying yourself first will alleviate stress, grow your bank balance, and enhance your ability to live a financially stable life.
Just like that, you can tell that you have an additional $490 at your disposal for the upcoming month. Set it aside for a rainy day, put it towards future savings plans, or buy 354 things from the dollar store (darn government).
Just make sure you recalculate it next month to avoid spending money you don’t have before you don’t have it.