In tight economic times, when businesses struggle, they take the easy way out and fire people to balance the budget. Workers can’t fire themselves, but they can fire some of their expenses.
Being proactive when things are bad can help avoid a quick descent of your savings account balance.
One way of doing a quick expense analysis is by making a list of your current expenses and deciding what to cut or reduce, such as a gym membership or eating out.
Since numbers can blur the eyes of most people, imagine you have three piles of money and each pile serves a different purpose. The first pile includes fixed expenses — the money you need every month to pay your monthly bills that must be paid, the second are the flexible expenses you spend every month that you may not need to spend or could be a different amount every month depending on how much you want to spend.
The third is the money you want to spend in the future and add to every month to meet that future expense.
Once you’ve put your expenses into each pile, you should get a clearer picture of what you can change and where your money is going.
The next step is to total the three columns to see your monthly expenses, although the future pile is technically an expense you’ll need for the future. Then divide each pile’s total into that grand total to get the percentage spent in each pile.
This will also show you how you are spending your money. If the future pile is low and the flexible pile is high, you’re living in the present instead of saving for the future. That’s dangerous if you find yourself with a big unexpected bill and you haven’t saved for emergencies. Or worse, you’re retiring and haven’t saved anything.
Harvard professor Elizabeth Warren wrote in a 2005 book, “All Your Worth: The Ultimate Lifetime Money Plan,” that half your after-tax income should be on the fixed pile, 30 percent on the flexible pile and 20 percent on the future pile.
This whole exercise is meant to capture your expenses and savings in one picture and give you a look at how your money is being used today. In addition, it lets you know what you can budget for the future and what you might consider cutting out today to meet future goals.
It will help you balance your use of income and protect your future.