Whenever I start working with a new client there are a few key pieces of information I want to uncover as early as possible: what are we working towards, what obstacles are we facing, and what resources do we have to work with? In theory this sounds like it would be a simple calculation, right?

For most of us, our income minus our expenses equals the amount we have leftover to tackle our other goals; BUT where my clients (and I suspect more of you) might be getting tripped up is on how to figure out what your expenses actually are. Yes some are obvious, your mortgage payment is your mortgage payment, your phone and internet bills are fairly consistent, but other expenses are less straightforward. Take someone who spends an average of $500 a month on takeout and restaurants.

Does this mean they have a takeout expense of $500? Or would this technically not constitute an expense because it’s not a necessity? In a situation where this person had to cut their expenses would it be reasonable to expect them to never eat out? Or would reducing the budget to something like $200 a month be more practical, and if that’s the case should this be counted as a $200 expense? That doesn’t make sense either because right now they’re spending $500. Have I gotten my point across? Budgeting isn’t always straightforward. At first glance this might seem relatively inconsequential. Dining out is a discretionary expense and you’ll decide what to spend based on what you want and can afford. It’s ok if it changes. When you’re planning though, these seemingly inconsequential details become more significant.

Establishing a comfortable baseline for your monthly spending is an often overlooked first step in the journey to building long-term financial stability and wealth. Even if you’re a high-income earner and less concerned about day-to-day budgeting, you still have to determine how much you need in order to “not have to worry about budgeting” so you can then decide how to deploy your remaining resources, and guess what – that’s still budgeting.

Whether I’m planning for myself or for a client there are two rules I follow: One, be realistic and two, be flexible. When it comes to calculating your monthly expenses, one way to be both realistic and flexible is by dividing your expenses into two categories: survival and lifestyle. Each number is important and serves its own unique purpose when you’re trying to plan.

Survival Expenses

These are your bare minimum monthly costs – think mortgage or rent, utilities, groceries, debt obligations, insurance premiums. Add them all up and this will tell you how much you need to bring in each month just to, well, survive. If you were to lose your job or be temporarily unable to work, you’ll want to know your bare minimum income needs so you can make your money stretch as long as possible. When you’re planning, you’ll use your survival expense number to calculate how much you should aim to save in an emergency fund and to decide how much disability or critical illness insurance you should buy.

Lifestyle Expenses

Lifestyle expenses are your survival expenses PLUS all the things that make life enjoyable. Think recreational activities, nights out, shopping, vacations, dining out, whatever it is you like to spend your money on. These are the things that you could technically cut from your budget if you absolutely had to, but in most cases you’d probably rather not, at least not entirely. In planning, your lifestyle expenses are what you’ll use to estimate how much you need to save for retirement or how much to pay yourself from your business. Imagine how miserable life would be if you calculated either using just your survival expenses? Not fun.

Lifestyle expenses are also what I use to calculate how much my clients have available to plan with today. In other words: income minus lifestyle expenses equals planning resources. Once I have that number, I take those planning resources and deploy them towards my various savings/debt repayment goals by setting up automated contributions and payments, so that the calculation is then flipped to be: income minus planning resources equals lifestyle expenses. By starting one way and then flipping it, I’ll be able to have some confidence that the budget I’ve set myself on is realistic and hopefully easy to maintain.

In case you’re someone who needs to hear this it is not irresponsible to spend money on living your best life, so long as you are also allocating some resources towards paying down debt and saving for your future. It’s all about finding that #balance. One of the things I frequently help clients with is making decisions like how much they can responsibly enjoy now vs what to set aside for a rainy day or retirement (or a house or a business venture or whatever else is on your list of aspirations).

Here’s a little chart to help you stay organized and, if you have any questions or comments feel free to leave them below or click here to email me.

	Survival Expenses	Lifestyle Expenses
What is is:	the amount of money you need each month to ensure your basic needs are met	your survival expenses PLUS everything else you spend money on to improve or enhance your quality of life
Includes things like:	mortgage/rent, utilities, groceries, minimum debt obligations, insurance premiums	recreational activities, gym memberships, nights out, vacations, restaurants & takeout
Comes in handy when:	you experience a short-term income disruption (for example job loss, starting a new business venture, disability or illness) or any circumstance where you temporarily need to make your money stretch as much as possible	you plan to stop working for a period longer than a few months (ie: childcare leave or sabbatical) where you would like to feel free to enjoy life and be able to cover more than just the bare minimum
How it’s used in planning:	calculating how much to save in an emergency fund (ex: minimum 3 months survival expenses), calculating disability/critical illness insurance needs	calculating retirement income, required salary/dividend payments from a business, developing short-term financial strategies that are practical and don’t demand too much short- term sacrifice

Coming Soon! I’m going to be launching a monthly money management workbook that will include easy ways to organize your expenses plus other tools to make budgeting and planning simple and, dare I say fun? Click here to join the waitlist and be notified as soon as it becomes available (likely June 2024).