Let’s face it. Budgeting isn’t much fun. It takes time and more than a little self-discipline. For example, most budgeting apps and software require that you spend at least a month tracking all of your spending. That can be a tough task for many people and it’s just the beginning. Once you’ve logged all your spending you’ll need to divide it into categories, determine where you can make cuts and then continue tracking your spending to make sure you’re staying within your budget. Fortunately, there is an easier solution. It’s called the One Number system.
In order to get to your One Number, you first need to write down your take-home pay or net earnings. Don’t make the mistake of calculating your income based on your salary. You need to think in terms of the money you actually take home. One easy way to know that number is to use the amount that hits your bank account each month – after your deductions and any taxes.
Add up your fixed costs
Step two is to add up your fixed costs. While this tends to vary from person to person it generally includes your mortgage or rent, child care, cell phone and Internet bills, utilities, insurance payments and transportation – if you pay a fixed amount. Now, subtract that number from your take-home pay.
Determine your financial goals
This will require some thinking but you need to determine your financial goals. This could include things such as saving for a down payment on a house, cutting your credit card debt, contributions to your retirement fund, paying back student loans and building an emergency fund. Once you determine your goals you’ll need to decide how much money you want to contribute towards each of them every month. For example, if you are saving for a $5000 down payment on a house you might allocate $100 a month this goal and then, say, another $100 a month towards reducing your credit card debt. Whatever you decide, you will need to add up these numbers and then deduct the total from your equation (take-home salary minus fixed costs).
Calculate your non-monthly expenses
Irregular or non-monthly expenses are ones that you don’t incur every month. They may be irregular expenditures but they are usually ones you can expect such as haircuts, holiday gifts, school tuition, your annual car registration fee and home maintenance (if applicable). Add up these expenses, divide the total by 12 and you’ll know your average non-monthly expenses. Now, subtract this number from your equation.
Your One Number
Congratulations, now that you’ve subtracted fixed costs, goal contributions and average non-monthly expenses from your take-home pay you’ve arrived at your One Number, which is the amount of money you’ll can spend on discretionary items every month such as groceries, eating out, clothes, concert tickets, magazines and your other forms of entertainment. Just think about this for a minute. Your One Number is the amount of money you can spend on whatever you like.
You may need to do some fine-tuning
No matter how diligently you work to get to your One Number you may discover that after a month or two you may need to do some fine-tuning. For example, you may have run into a couple of non-monthly expenses you hadn’t thought about or maybe your auto insurance premium got bumped up. Don’t fret about this. Just make the necessary corrections and you’ll have a new One Number. And in just a few minutes.
Never but never exceed your One Number
Think how much simpler this is then traditional budgeting. You are probably able to arrive at your One Number in an hour or less. Wouldn’t it be liberating to know exactly how much you can spend on the fun things of life because you now know your One Number. But – spoiler alert – it’s critical to not exceed your One Number. If you do exceed that number, you’ll have to do one of two things. You’ll have to either go back and change one or more of your numbers to get to a new One Number or second, you’ll need to find a way to increase your earnings.
There are several advantages to the One Number system of money management. You already know the first, which is that it’s much simpler than traditional budgeting. Another is that it removes the biggest pressure of budgeting as it eliminates the need to track all of your spending. Plus, you won’t be lying awake at night wondering whether or not those new shoes blew up your budget. This is because so long as you can fit them within your One Number you’ll know you’re okay.