It's July...Time to Create a Lifestyle Plan

Creating a lifestyle plan is one of the most important steps to building financial stability. A lifestyle plan helps you to prioritize your monthly spending. It helps you set specific financial goals and guides you towards reaching those goals.

With a lifestyle plan, you allocate your monthly income towards five categories that are based on how you live and spend money, which defines your lifestyle. The five lifestyle categories include housing expenses, transportation expenses, life expenses, savings and debt obligations. Your monthly income is divided to allocate a specific percent towards each lifestyle category. This gives you a guideline to follow and triggers you to make corrections as needed.

The first lifestyle category is housing expenses.  The maximum amount of your income for this category should be 35 percent.  For example, if your net monthly income is $4000, then the maximum amount for your housing expense should be $1400. In the housing category, there are several items to consider within the 35 percent. This includes your monthly mortgage amount along with the insurance and property tax.  If you are a renter, this includes your monthly rent amount along with renter’s insurance. Also, you must include monthly utility expenses such as electric, gas, water and sewage. There are other expenses that were once a staple in the household but now have become optional. The use of cell phones is replacing home telephones and internet apps are replacing cable subscriptions. If this is the case, you must remember to include these expenses in your lifestyle plan.  Some other items to include in this category are lawn care, property repairs and cleaning services.

The second lifestyle category is transportation expenses. The maximum amount of your income for this category is 15 percent.  To continue with the same income example of $4000, the maximum amount for transportation expense should be $600. Of course, the monthly car payment is the majority expense for this category. It is important to remember that insurance and gas are necessary expenses, not desirable expenses, so the car payment alone cannot take up the entire 15 percent. Another item to consider in this category is vehicle maintenance.  This is especially necessary for individuals that may have older vehicles. Including maintenance in your lifestyle plan allows you to be prepared ahead of time for expected or unexpected expenses.

The third lifestyle category is life expenses. The maximum amount of your income for this category is 25 percent. With the income example of $4000, the maximum amount for life expenses should be $1000. Although the percent of income is on the lower end of the scale, this category has the largest number of items to consider including in your lifestyle plan. This category includes groceries, meals outside of the home, entertainment, clothing, dependent care, self-care, health care and spiritual contributions and personal growth.

The fourth lifestyle category is savings. The percent of this category is a little different than the others. Because this category is savings, which includes emergency funds, short-term and long-term goals, the percent is a minimum amount of income instead of a maximum amount of income.  The minimum percent of the savings category is 10 percent. Continuing with the income example, the minimum amount for monthly savings is $400. Again, for this category only, it is beneficial to go beyond the designated 10 percent. The more you can save, the better your financial stability will be.

The last lifestyle category is debt obligation. The maximum amount of your income for this category is 15 percent. Using the income example, the maximum amount for debt obligations is $600. This category includes any outstanding balances that are owed for credit cards or loans. Remember, this does not include your car loan. The monthly car payment was included in the transportation category. The debt obligation is the most important category to remain below the designated percent. Keep in mind, your amount of debt obligation dictates the style of life that you can live. The higher percent of income that goes towards debt obligation means less of the income that can go towards desirable things, such as entertainment, travel or savings.
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The total of the five categories adds up to 100 percent of your income. If you are at the maximum for each category, you will have no discretionary income. Discretionary income is calculated by subtracting monthly expenses from your monthly income. If there is more income than expenses, you are left with discretionary income. Discretionary income is typically used to fulfill desires of luxury items, such as fancy clothing, leisure travel, additional vehicles, vacation home, electronics, or other desirable gadgets. Another typical use for discretionary income is to reduce the amount of debt obligation. If you are only paying the minimum monthly payments on your debt obligations, you will remain in debt for several years. If you are unable to be specific when creating your lifestyle plan to include necessary expenses and desirable expenses (needs and wants), it is very important that you stay below the maximum for each category. This will allow you to have discretionary income left at the end of the month to cover the items you left out of the lifestyle plan.  

Many people have negative feelings toward creating a lifestyle plan. They associate it with being restrictive and overwhelming. Although there is work involved in creating a realistic lifestyle plan, it ensures that you will have money for the things you need for your survival as well as for the desirable things that are important to you. It allows you to create the road map for the lifestyle that you desire.