The Simplest Budgeting Method We’ve Ever Heard
The fundamentals of budgeting are pretty simple: spend less than you earn. But how you do that can get pretty complicated.
Different people have different approaches – it’s a little like fitness; you might enjoy running while another person might prefer to do dance classes or crossfit or weekly social soccer games. It doesn’t matter so much how you do it, as long as it works for you.
Some people might prefer to do a comprehensive spreadsheet logging everything they’ve ever spent money on. Some people might like to use an app; others might prefer pen and paper. You might calculate percentages, like in the 50/20/30 method, or you might keep meticulous records of what you spend.
For those of you who find those approaches a bit daunting, the following method might be what you’re looking for: it’s the simplest one we’ve ever heard.
The Magic Number
American financial planner Avraham Byers has written the book on the magic number method (literally). He tells Inc. of how he used to struggle with his personal finances, despite being a financial planner. It was only when he figured out his “magic number” that it all fell into place.
What it is
Your magic number is the amount of money you can spend every day without going over your budget. Once you’ve calculated your number, that’s the only figure you need to carry around in your head. It’s ridiculously simple, which means it’s a great solution for people who hate complicated approaches to budgeting.
How you calculate it
There’s a little bit of work involved up front, but once that’s taken care of, all the hard work is done.
To find your magic number, you need to calculate your fixed expenses and then subtract that from your after-tax income. So you might need to go through old bank statements or track your spending for a month in order to figure out what your fixed expenses are.
Use a yearly estimate of your fixed expenses, subtract it from your net yearly income, and divide that by 365. The figure that you have is your “magic number”: the amount of money you can spend every day.
Why it’s helpful
If you’ve calculated your fixed expenses accurately, you should now have an accurate picture of the amount of money you can spend on impulse purchases, treats and whatever else you like to do with your disposable income. Having an exact figure in your head when it comes to “play money” (i.e. the money that isn’t allocated to boring stuff like bills) can help you make more mindful decisions when it comes to brunches, nights out or new season clothes. It gives you clear parameters to work within.
It might not suit everybody – just like exercise, no approach to budgeting is one-size-fits-all. But it’s a simple method for those who like a more no-nonsense approach to their spending money, because it’s important to find what works for you.
Amelia is the Editor of The Cusp. You can find her on twitter @amelia___m or instagram @ameliamarshall.