How to Create a Living Margin
Whether you’re a recent college graduate, skilled worker, or experienced professional, this guideline can help you figure out how much to allocate every month and determine the order in which your earnings should be allocated.
Creating a living margin might be exactly what you need to get your finances under control once and for all. It will help you identify problem areas, set limits you can live with, and make your cash flow work for you to create a margin.
If you’re wondering how to determine if you’re financially balanced, let’s start with the basics of the living margin strategy for personal finances. First, make a list of all the things you spend money on.
Don’t forget those items that automatically come from your checking account or are charged to your credit card. The more complete your spending list, the better your results will be. This list will help you discover if you’re out of balance.
The living margin strategy for personal finance is low-maintenance compared with others. It doesn’t require you to categorize every expense or keep a detailed spending record. It’s a great option if you prefer a hands-off budgeting system or don’t want to feel like you’re budgeting.
Next, you’re going to create your living margin budget. The 20/60/20 budget guideline (recommended starting point) can be easy to follow because, instead of telling you how to break down your budget across multiple categories, it splits everything into three main categories:
Financial Goals: First, you will allocate 20% of your income toward important "first-fruit" contributions that will help you secure your financial freedom. This will include paying your mentor or spiritual guide, giving to your community and those in need, and saving for retirement. However, your financial goals can also include larger saving priorities like passive investments or family vacations. (Think of it as give 10% and save 10%)
Fixed Costs: Regarding fixed costs, we suggest you keep your monthly total to no more than 60% of your income. These are bills and expenses that don’t vary much from month to month, like rent or mortgage payments, transportation costs, utilities, and childcare. We also include memberships and groceries in fixed costs because you’re committed to paying them monthly.
Flexible Spending: Finally, you’ll budget no more than 20% of your income toward flexible or discretionary spending. These are day-to-day expenses that can vary from month to month. You can include eating out, shopping, hobbies, entertainment, and other “wants.” It doesn’t matter what you spend your money on in this category if you know what you must pay.
To determine your flex spending amount, you will want to first subtract your financial goals and fixed costs from your net income. This way, you’ll know that the amount left for flexible spending is yours to spend however you want. (As you'll learn later, this involves setting up a flexible spending account)
If your absolute fixed costs overshoot the 60% mark, you may need to dip into the flexible spending portion of your budget for a while. Alternatively, you may need to decrease your financial goals and work towards the 20% target.
It’s not the end of the world, but you’ll have to adjust your spending. If you’re eager to get out of debt as fast as possible, you may decide that your flexible spending can wait until you have some savings or your debts are under control.
But your living margin budget shouldn’t be so tight that you can never buy anything just for fun. The living margin strategy can help you focus on the big picture and reduce impulsive purchases. When you save first, you have less money to spend and use the balance on things you need or value.