I’m a huge fan of LearnVest, a website about all things personal finance. They have great articles on retirement planning and investing. My favorite concept of theirs is the One Number strategy for creating a budget. I think it’s an elegant way to create some budgetary guidelines without being too restrictive on your spending. Maybe one week I eat out a lot and go to Starbucks every morning. The next week I buy a new pair of shoes and bring PBJ to work for lunch. The next week, I buy lots of fancy groceries so I can bake seasonal cupcakes to bring to a party:
These choices are fine within the context of these guidelines, and you don’t need to plan those details beforehand. I love that about this budget system: I just live my life, but every day choices happen within the guidelines, so I know my bases are covered which makes my daily financial decisions totally unstressful!
How I use the One Number strategy:
1. I add my rent, utilities, cell phone, recurring monthly prescriptions and subscriptions, and monthly charitable donations together. These are my FIXED COSTS.
2. I add my life insurance premium, retirement contributions, emergency fund amount, travel fund amount together to get my FINANCIAL GOALS AMOUNT.
3. I add my annual membership amounts, credit card annual fees, club dues, and an amount set aside for gifts (I set this at like $20 a month, so $240 for a year; I don’t really keep track of this but it seems like a good idea to set some aside for holidays and birthdays). These amounts are added together and then divided by 12 to get my monthly amount for NON-MONTHLY EXPENSES.
4. Finally, I add 1, 2 and 3 together to get a big number. Then I subtract that number from my monthly take-home pay amount to get my MONTHLY ONE NUMBER. I further divide this number by 4.3 (since some months have more than 4 weeks) to get my WEEKLY ONE NUMBER since I find it easier to keep track of my spending on a weekly basis. LearnVest calls this number a flex spending amount, which for me is just under $150.
The ‘flex’ part of this number is that I can do whatever I want with this money. Since I’ll generally either spend more money on groceries or eating out, that’s a choice I can make within this amount. I set up automatic transfers for certain things like retirement contributions that happen a day after my paycheck comes in. That’s another way that the money in, money out system I use is quite unstressful. One less thing to worry about!
LearnVest’s article on this system can be found here.