Budgeting is a bear, right? You have to create all these spending categories and then spend like an hour after every Target run assigning each purchase on the receipt to one of those budget categories. Ugh.
Fortunately, there’s a simpler way to keep your spending on track. It’s called the Daily Spend Limit. Here’s how it works:
Total up all of your major fixed monthly expenses – Housing, car payment, et cetera – and deduct them from your monthly net pay – the amount in our paycheck after taxes, 401k contribution and other deductions. Divide the remaining balance by the number days in the month, and that’s how much you can spend each day on all your other wants and needs.
Example: Say you make $60,000 and net 65% of that after taxes, 401k and health insurance deductions. That means you bring home $3,200 per month. Deduct $1,200 for your rent and car payment, and you’ve got $2,000 left over. Divide that by 31 days in the month and you’ve got about $64 to spend each day.
Sounds like a lot, right? Not really. Remember, this has to cover everything from the cable bill, to dry cleaning to groceries to utilities to gasoline to girls’ night out to golf. If you put $50 of gas in the Silverado that leaves just $14 for any other needs/wants that arise. So, maybe this is a day you brown bag lunch, or skip happy hour.
Ok, so how do I stick to the DSL system?
Set calendar reminders for the dates when the gas and electric bills get paid. Those will be tight, too. Owe more than $64 on the power bill? No problem, reduce your daily spending for a few days to cover it. Same thing with grocery shopping or Saturday’s trip to the ballgame. If you must go over one day’s DSL, you need to stay under the limit on other days. That’s the discipline part of the system.
The biggest benefit of the DSL system is that it forces you to be aware of your spending choices. When every purchase goes against a daily cap, you are more mindful of what you purchase. A $12 lunch may seem insignificant when measured against your $60,000 salary. But when it comes out of a $64 DSL, you may think twice. Ditto a $3 tin of mints or $15 per month premium cable channel.
Conclusion. Once you’ve mastered the DSL system, you should start thinking about creating an actual monthly budget. Getting all your expenditures down on paper and tracking them closely is the best way to make sure your money is being used efficiently to meet your wants, needs and goals. In crafting a traditional budget you will surely be surprised by how much you spend in certain categories. Armed with this information you can decide what spending to nix (digital subscriptions you forgot about) and where to shop for better deals (car insurance, cell phone service, clothes, shoes).
It takes time and effort, but you can’t measure the value of knowing how and where your hard-earned money is going. The DSL system is a good way to get started on that worthy goal.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.