Remember that there’s a difference between your income – the total amount you earn – and your take-home pay, or net income. That’s the amount of money earned after taxes, insurance, or other costs have been subtracted. Base your spending plan on your take-home pay.
To get a clear picture of how you actually spend right now, it may help to keep a spending diary for a month or two. This means saving your receipts and writing down the items and amounts for everything you spend.
Fixed expenses are regular amounts that generally don’t change much -- monthly expenses like rent or car payments, or bills you receive less often, like car registration or insurance. Flexible expenses are necessities. You buy these regularly but have more control over how much you spend, e.g. groceries, long distance phone calls. Discretionary expenses are dollars you choose to spend, but don’t necessarily have to spend on things like clothes, movies, and going out to eat.
After writing your spending plan, you may find that there’s not enough money to go around. Since your fixed expenses may be difficult to change, look for ways to decrease your flexible and discretionary expenses and/or increase your income.
Most people can’t afford everything they want to buy, so they have to make tradeoffs. Making tradeoffs may mean giving up things you can do without, or buying something less expensive that still meets your needs, in order to afford the things that are most valuable to you. The idea of making tradeoffs may also relate to how you spend your time. For example, to make more money at your job, you may have to work more hours.
Create a spending plan you can live with. Be realistic and flexible. The trick is to live within your income so that you can pay your expenses but still have some money left-over for your own flexibility. Review your plan every month. Adjust it as your income and expenses change.
Savings is a discretionary expense because it’s up to you to decide how much of your money you’re going to set aside for your future. Each month as you pay everyone else for things you need and want, don’t forget to “pay yourself” by saving!