2. Don’t spend more than you have.

So are you tracking your ins and outs? Any surprises? Does noting down prompt you to think before buying? Now you are getting a more objective picture about what you spend and earn, let’s go through the rule number 1: balance.

Don’t spend more than you have. Your expenses should fit in your income… else you fall (more about falling in lesson 3)!  

But it is a bit more complex than it seems. Why? The big challenge is that expenses and incomes have usually a different timing. For instance, we earn once or twice a month… but some expenses are every day, or some are yearly.  And our human brain really struggle with managing time: think about it… are most people punctual? Do projects always start and finish as scheduled?

We don’t forget daily expenses… like food or transportation. But we struggle with less frequent expenses, like a yearly school fee, or a yearly tax. Our brain focuses on the short term. And as many expenses occur in the future … next holiday, next family celebration… or retirement…fitting these expenses in our income… without losing balance is really hard work. It does require hard thinking!

Let’s put this into practice

1. List your expenses that are not daily, like rent, school fees, holiday, tax, etc…      
2. All expenses are not the same. So think about which category they fall into: this will help you prioritise… because the list is likely to be too long! 
   1. Commitment: You have promised/signed a contract: you have to pay.
   2. Goal: Something you would like to, like a house improvement, or a present for your child.
   3. ‘Obligation’ like holiday, or family support … an expense that you feel morally obliged to do for your family or relatives or friends. University for your child may fall under obligation but the school fee for the current school year will be a commitment for example… while a degree for you may be a goal.
3. Ratio: will help you calculate how much you need to save for this expense every month: for example, if the expense is is once a month, write “1”; if it is once a year, write “12” (you have to save a twelfth of it every month), if it is in 5 months, write “5”, etc… For example, the school fee is once a year every September and we are in May. If you already regularly save for it, write 12. But if you have not saved anything for it, then write 3 (you have 3 months to save for the whole amount). 
4. Add up: this is the scary part, add up all your list and prioritise according to what you can really save for while staying within your income (you still need to eat, wash, phone, get transportation…).                                  

Your homework:

1. Check your balance: look at your tracking: do your expenses fit in your income? Don’t spend more than you have!
2. List all your yearly or less frequent expenses – including longer term expenses you are thinking about (wedding? house improvement? Trip?…).