How to Quickly Determine How Much Money You Will Have for the Year

Many of us have a monthly budget, which means that we often spend a little more on one month and tell ourselves that we will catch up in the next month. (Then the next month comes and we tell ourselves that we will make up for it a month after that, and so on.)

Or we look at our monthly budget and ask ourselves if we can afford the next summer vacation, and when our budget tells us that we have already spent all of this month’s income, we book the vacation anyway, because … hey, it will work out, huh?

If you want to know if you can really afford this vacation (or a new pair of boots, or a shampoo not made for horses), you can’t look at the monthly budget. You have to look at your annual budget – and you need to know what your discretionary income is for the entire year.

How to calculate your annual discretionary income

Since we all have slightly different income streams and expenses, we all calculate our annual discretionary income slightly differently, but the basic formula is “income minus fixed / core expenses”.

I am using myself as an example.

In 2018, I will probably make about $ 66,000 as a freelancer. From this number I subtract:

  • 30% for taxes ($ 19,800)
  • 15% that goes straight to my savings account ($ 9,900)

Remaining $ 36,300. Then I subtract my monthly overhead:

  • Rent (650 $)
  • Tenant insurance ($ 16)
  • Medical Insurance ($ 580.60 – and that’s for the Bronze plan)
  • Internet ($ 40)
  • Phone ($ 98)
  • Electricity (~ $ 25)
  • Water (~ 25 $)
  • Shopping at grocery stores, including food / toiletries / detergents, etc. ($ 300-400)

My monthly overhead is roughly $ 1,800 (before you ask, I don’t have a car or debt), so I multiply that by twelve and subtract from $ 36,300.

This leaves me with $ 14,700 in discretionary income for the entire year.

Or $ 1,225 a month.

This income should cover all restaurant dinners, movie tickets, haircuts, clothes, books, gifts, charitable donations, vacations, etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. Etc. $ 14,700 for discretionary items – and since I’m a freelancer, my business expenses should also be covered from these 14 thousand dollars. (Before you ask: yes, I know that channeling most of my discretionary income into my business will likely reduce my taxes, which may give me a little more discretionary income that I can channel towards personal spending.that level in your own budget, continue.)

If you are a W2 employee, it may be more helpful for you to calculate your discretionary income based on the wages you receive, as taxes, pension contributions, and medical contributions will already be deducted.

If you have variable income (freelancers, hourly workers, people with a ton of part-time jobs), start with a conservative estimate. I would like to make over $ 66K in 2018 – I am always working to increase my freelance income – but it makes sense to budget as if that’s all I can make.

Likewise, when you know your discretionary spending, you may want to keep your actual discretionary spending below that number in case something happens to your income. But before you get to this step, there is one more thing you need to do.

Once you have your Annual Discretionary Number, Subtract High Discretionary Spending

This is how you know that you can afford for sure that vacation: subtract it from your annual discretionary expenses for the year.

The same goes for vacation travel, gym membership, and even little things like a Netflix subscription. If you can bet a number on it and you know you’re likely to waste it, subtract it.

In my case, I estimate that I will have $ 14,700 in discretionary income in 2018. I know from past experience that Christmas will cost $ 1200 and my annual vacation will cost around $ 600. That leaves $ 12,900, or $ 1,075 a month. From there, I can start getting regular monthly expenses:

  • Netflix ($ 11)
  • Haircut ($ 40)
  • Patreon Subscriptions ($ 60)
  • Theater tickets ($ 40)

As a result, I am left with $ 924 of discretionary income per month (which in my case should cover both business and personal expenses), and I did not even consider restaurants and clothing, which are two huge expenses for most people.

When you start calculating your annual discretionary income, you will likely find that you have a lot less money to spend than you thought. This is the hardest part of doing this exercise. The other tricky part is sticking to your annual discretionary cap. You don’t want to use up your entire discretionary budget by September!

However, by sticking to – and staying below – your annual discretionary limit, you can more easily decide if you can say yes to the weekend trip your friends are planning, as well as any other unexpected opportunity (or expense) that comes with your paths. next year.

And listen, if you spend too much money, you can pay it off with the money you put in your savings account every month. (You put some money in your savings account every month, right?)


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