Take Control of Your Finances: A Guide to Smart Spending

Saving money today feels tougher than ever. With rising inflation, higher interest rates, and sky-high housing costs, it’s no wonder people feel squeezed. But I believe there’s a way to navigate these challenges and still achieve financial well-being. I call it Behavioural Cash Flow.

The Power of Cash Flow

Think of your cash flow—the money that flows in and out of your bank account—as the engine that drives your lifestyle. It’s essential for both immediate enjoyment and future security. By understanding and managing your spending, you lay a solid foundation for financial well-being and long-term retirement planning.

There are many things in life you can avoid. If you don’t like riding a bike or driving, you don’t have to. But you can’t avoid money. Whether you like it or not, you HAVE TO DEAL with money. So, you must analyze your spending and distinguish between two types of expenses: Committed and Flexible.

Two Types of Expenses:

  • Committed Expenses: These are essential, predictable costs such as mortgage payments, insurance, medical expenses, utilities, and savings, which are crucial for maintaining your lifestyle. They are non-emotional and carry a low risk of overspending, with potential for reduction to enhance financial stability.

Example: On a bad day, you’re not going to drive around the block a hundred times just to fill up your gas tank again.

  • Flexible Expenses: These are expenses you have some control over, such as groceries, eating out, personal care, pet care, hobbies, and holidays. They can be variable and unpredictable in nature and are often influenced by our emotions. 

Example: If you’re in the grocery store you might choose impulse purchases as you round the different aisle. 

There’s a major risk of overspending on flexible expenses. They’re also hard to track and often mixed with other expenses, paid in various ways—debit, credit, and cash.

So, how do you determine what’s a good number for flexible spending?

Aim to allocate between 20% and 25% of your take-home pay to flexible expenses, based on your income and priorities. For instance, if your monthly take-home income is $5,000, your flexible spending should range from $1,000 to $1,250, with weekly targets of $230 to $290. Overspending below 20% may mean deprivation while exceeding 25% could jeopardize your financial security in the long run.

Practical Tips for Managing Your Flexible Spending

  1. Determine Your Flexible Spending (Expenses) Number. Calculate your monthly and weekly targets for flexible spending based on your take-home income.
  2. Set Up a Separate Bank Account for Flexible Spending. Set up a separate bank account solely for flexible spending. Transfer your allotted funds into this account weekly to easily monitor your spending.
  3. Avoid Mental Accounting. If you use a credit card for a flexible expense, immediately pay off credit card charges, avoiding both mental accounting and overspending.

Key Takeaways

Understanding your spending patterns and distinguishing between committed and flexible expenses is key to a less stressed life. If you aim to spend 20-25% of your take-home income on flexible expenses, you can achieve a healthier financial balance.

Ready to Take the Next Step?

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