The scattered receipts, the excel spreadsheets, the meticulous mental accounting of trying to figure out if you spent $4.63 or $4.93 on this morning’s latte…it’s enough to drive even the most analytical person crazy.
And then there’s the matter of trying to figure out how much is too much or too little for each line item in your budget. Should I budget $100 for shopping? Is that enough? Am I going to spend more than $50 at happy hour this month? Have gas prices come down enough to consider $75 enough for gas?
Sometimes life isn’t so simple and you can’t plan out how your future self will spend every single penny. I mean, you know what you have to spend on rent, insurance and other fixed costs but how can you possibly know how much to set aside for those random purchases that don’t occur every single month?
Insert the “One Number Budget”.
Now, I’ll be honest…this strategy isn’t something I came up with. I didn’t even realize it had a name until I entered the personal finance blogging world. However, I have been using it to manage my finances since I earned my first paycheck at 15 years old and, after ten years of managing my own money, I see no reason to switch to any other method.
Here’s how it works:
- First, calculate your fixed costs. Fixed costs are the essential bills that stay consistent from month to month. Think rent or mortgage, utilities, cell phone bill, cable/netflix.
- Next, figure out what your financial goals are and how much need to achieve them. Goals can include building an emergency fund, paying down consumer debt, seed money for taxable investment accounts, or saving for big ticket items like a big vacation or saving for a down payment on a home.
- Then, calculate your non-monthly expenses. Here, I account for smaller savings goals like putting aside money for routine car maintenance, holiday gifts and credit card annual fees. I usually don’t put aside the same amount each month; nor is it a large amount. But by putting a small amount of money each month, I can make sure I’m not caught off guard with necessary expenses that don’t pop up every single month.
- Finally, add up what’s left over. This is your “one number” that you can spend as freely as you like. In my expenses vs income post, I included a Groceries/Gas/Misc. line item. Here is where I account for any variable expenses such as groceries, luches at work, movies, shopping, personal care items, etc. No more trying to figure out how much to budget for each category or overspending in any one section.
So there you have it! The easiest way to budget. By focusing on one number, you can make sure you have enough money set aside to pay your essential bills, save for financial goals, cover non-monthly essentials and spend what’s left over without feeling guilty.
Thanks for reading.