Improving Your Finances - Step 2

In step 1, you learned the importance of having clarity of your current financial situation.  You now have a clear understanding of your total income and your total expenses.  At this point, you are faced with one of the following situations:

1. Your income doesn't cover all of your expenses and there is no money left at the end of the month.  
2. Your income covers all of your expenses but still there is no money left at the end of the month.
3. Your income covers all of your expenses and there is money left at the end of the month.

Number 3 is the ultimate financial situation.  You want to have more money left at the end of each month to pay down/off debt or save for your financial goals (college funding, emergency funds, short-term goals, long-term goals, start your own business or retirement). Now that you have clarity of your financial situation, it is time to determine if your income is allocated appropriately to your expenses.  

There are five lifestyle categories that represent areas where your money is spent on a monthly basis.  Each lifestyle category has a guideline for a maximum dollar amount to be allocated on expenses each month.  The guideline is based on a specific portion or percent of your monthly income.  The allocated expenses should not go over the guideline maximum dollar amount.  If your expenses exceed the guideline maximum dollar amount, you will need to reduce your expenses accordingly to remain under the guideline maximum dollar amount.

Below are the five lifestyle categories and the corresponding percent of income to use as a guideline for the maximum dollar amount to allocate on monthly expenses:

​Here is an example to help you use the lifestyle guideline chart:

​With this example, the monthly income is $3,500.  The maximum dollar amount to spend each month in the housing lifestyle category is $1,225.  If you are currently spending more than $1,225 for your housing expenses, you will need to review each expense to determine what can be reduced or eliminated.  For the savings lifestyle category, the guideline is 10% of your monthly income.  However (for this category only), the 10% should be considered as a minimum guideline ​ instead of a maximum guideline.  Keep in mind, it will NEVER hurt to save more than 10% of your income.

Going back to the financial situations described at the beginning (income doesn't cover expenses or income covers expenses but no money left over), using the lifestyle guidelines will help you to reduce expenses and improve your financial situation by having more money left at the end of each month.

If you are looking for a tool to assist you, visit www.lifestyle-checkup.com. This tool will help you calculate your lifestyle category guidelines, based on your income, so that you are staying within the maximum dollar amounts to reach the ultimate financial situation of having money left over at the end of each month.