4. Carry only what you can bear.

Stay out of trouble! It is easy to get carried away and get priorities wrong. Make sure you keep enough for your commitments by setting a spending limit.

This is our fourth lesson, so if you follow these lessons every week, your tracking should soon include one month of expenses and incomes. Any surprise? Have you got more visibility on what you are spending?

You should also have listed your longer- term expenses (all those we tend to forget!) and your debts. Too many numbers? Too long lists?

Don’t give up! If you don’t manage your money, others will do it for you: shops, lenders, family, friends… All this tracking and these lists are:

1. To know what’s going on (if you don’t know the problem, you can’t find the solution!),

2. To focus on what matters, because money… is about choices and decisions. But there are always too many choices! So how can we take better decisions? Focus on what matters, prioritise. For example, when you travel, you only pack what is the most important. That’s the same with money.

All expenses are not the same: sorting out expenses by types will help you choose. Needs and wants? Okay, food is a need… but is a five course meal… a need? What about a colouring book for a child? It may be a want if it is every day, but if this is the only present for the year? You are renting a 10 room house: is the rent a need or want? And what about mobile phones and computers? Needs or wants? Needs and wants turn out to be quite subjective and are not effective enough to take decisions.

Let’s sort out expenses differently: the expenses that you control (you decide)… and those that you don’t decide any longer – why? Because you have already promised them to others: commitments like rent, paying back a debt, utility bills, phone bills, etc… any amount you have committed, or promised, to pay. Commitments are priorities number 1 – even if you have committed to something that you could do without (too big a home, too expensive a phone plan…), you have to pay, because if you don’t, commitments become debts.

Don’t carry more than you can bear = don’t over commit. Before taking any commitment, calculate carefully if it “fits”… or will make you lose your balance.

Let’s put this into practice

Spending limit: take your future expenses list, and sum up all the commitments for one month. (If some are yearly, divide them by 12). Subtract the monthly sum of commitments from your usual monthly income. What is left… is what you can decide on. Divide this amount by 30 days, and this will tell you how much you can spend on daily life: it is your daily spending limit. If you spend more than this, you are actually spending the commitments… and running into trouble.

The daily spending limit helps get self-control and know how much you can spend… and when you should stop. Have you done your list of future expenses? The first category was ‘commitments’. Let’s take a closer look.

If you earn a monthly income:

1. Take all your commitments and calculate how much they add up for one month. (If one commitment is paid once a year, divide it by 12 for example).
2. Subtract the commitment monthly amount from your salary. What is left… is what you can spend as you want, on daily life and other expenses and save for future projects.
3. Divide by 30 days… this is what you can spend every day. You can even go further and include in your limit how much you want to save for projects or goals
   Let’s take an example (numbers are made easy – it can be any currency): 

The ‘spending limit’ is also called ‘available income’.
   

We usually remember our monthly salary…but that’s the wrong number to keep in mind. Part of our salary is already spent by our commitments. So remembering our daily spending limit gives a better indicator.

If the daily spending limit is not enough to live, go through all your commitments and look at which ones you need to reduce. Carry only what you can bear!
Use the spending limit to calculate if you can afford a new commitment… before signing in! Let’s look at the example above: you want to move to a new place and the new rent would be 210 per quarter (every 3 months). So 210/3= 70… you would have 70 -40 = 30 more commitments every month. So take your income minus commitments = 300 – 30 (extra rent) = 270 divided by 30 days in a month = 9 (daily spending limit). Could you still live with 9 a day and save for other projects?

If you earn a yearly income :

The daily spending limit also works if you have a big income once a year.

This time you calculate all the commitments for one year (so if you have a bill once a month, you multiply by 12). It is very (very!) tempting to spend a big income… so setting money aside for commitments, and calculating what you can really spend is even more important..

If you earn an irregular income :
The daily spending limit works very well with a monthly or regular salary. What if you earn an income from time to time? If you earn money on a daily basis, calculate how much you have to keep for your commitments for one day. Then, if you earn more, set it aside (at the bank for example) and when you earn less, try to save this amount as soon as you get a bigger income and made up for the day when you didn’t save..

Example :

Each day, you need to set aside 3.33 for expenses plus the percentage (in our example, 10%) for taxes.

Example for one week:

(*) to set aside for monthly, yearly commitments…

(**) We can set aside more or less, but at least 2 x 3.33 for Tuesday and Thursday.

In this example, by the end of the week, we had set aside $33.30, which covers 10 days of expenses. And we’re also saving for taxes as we earn income. It’s like setting aside water for the dry season, or like birds hiding seeds for later :).

Action plan: calculate your own spending limit. Download this file below to help you. If you have questions, please ask! Post your questions on the forum or send a message.