How Big Is The Gap?

I haven’t written a ton on our Back to Basics series this week because it is pretty, well, basic.  This week’s task was to figure out where your money is going, primarily by some sort of tracking.  As my husband and I chatted about our tracking (or non-tracking), I said something along the the lines of “our spending plan has a largish surplus.  Where is it going?”

And that, my friends, is the idea between today’s exercise:  Figuring out how big the surplus is between your income and your fixed and essential expenses.  It’s pretty quick and easy:  Add up all your income, then add up all your fixed and essential expenses (rent, food, car insurance, gas, utilities, child care.)  Subtract your essential expenses from your income and see how much money you’ve got left for non-essential expenses.

You get to define essential and non-essential expenses however you want, and some items fall a little into both categories.  Food and clothing come to mind – you need a basic level of both food and clothing, anything over that is a non-essential.

This is a very useful exercise in the sense that it gives you a quick sense of how much of your spending is discretionary and how much is obligated.  Being burdened with essential spending restricts the choices you get to make with your money.  Having a high level of non-essential spending is good in the sense that you have control and choice over that spending.  You can’t decide not to pay your car insurance (don’t even go there) and redirect that money to debt repayment or savings.  You can choose to decrease your movie rental or art supply budget to free up that money for other purposes.

The entire point of getting Back to Basics is to put yourself in a position where you are deciding what to do with your money, instead of having it all obligated as soon as it is earned.  Knowing how much of your current spending is required is a great step in that process.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.