Therese’s passion for personal finance began during her first financial literacy program in 5th grade. Ever since, she has honed in her skillsets with a bachelors degree in finance from the University of Maryland, self study, research, and volunteering with nonprofit organizations that focus on mentorship and financial literacy for children. Her mantra is to focus on the individual because all of our journeys are unique which requires nuanced advise. She teaches good habits that elicit mindset changes that gives richness to your personal finances and other aspects of your life.
Welcome back! In part two of this series we will discuss the opposite of the top-down budgeting approach. As a quick refresh, the top-down approach is most useful to those who have a steady, monthly inflow of cash. Today, we will discuss a bottoms-up approach which might be more useful for individuals who have a variable monthly income. This is especially true for those who work in the gig economy (e.g., Uber, Doordash, Rover) and those with variant hours (e.g., part time employees, students).
While the top-down approach focuses on allocating your income, our bottoms-up approach will focus primarily on meeting your expense needs. We will continue to use the analogy of a tank of gas from Part I. When your income varies it can be hard to budget on a monthly basis since it all depends on how much you brought in that month. By focusing on your expenses and diligently tracking your spending, you can create a budget that works for you, feel confident in managing your finances, and be empowered to achieve your short- and long-term financial goals.
To get started, the first exercise is to track your monthly expenses over a 2- to 4-month period. Try to account for every penny spent! There are many apps that can help you track your spending (check out some options here), or you can use Excel or pen and paper. By tracking your typical expenses over a slightly longer period of time, it gives you the chance to understand which expenses are one-off vs. recurring – you can use your judgment to remove one-off expenses if it truly is irregular or non-recurring. Once you have compiled your list of expenses, tally it all up to find out your average monthly spend. That final value is your tank of gas at 100%. This number is the minimum income you have to make each month to meet all financial obligations and to afford your current lifestyle.
Once you’ve determined this value, the next step is to determine how feasible it is to consistently earn this amount each month. If your job is seasonal, are you only able to achieve this during certain months, or can you pick up an extra job in the off-season to earn this amount on a regular basis? If you find yourself in the former category, you should go back and assess if any costs can be cut to allow you to save up in seasons where you’re earning more to help assist with expenses in months where you’re earning less. In our current environment, it is crucial to be able to meet your minimum costs and avoid finding yourself in a financial hole if issues arise or you have a few bad months.
This minimum amount is just that: the minimum income you need to cover basic costs. The above method doesn’t account for savings, putting money into an emergency fund, or one-off costs that can occur unexpectedly. However, understanding where your money is going and the amount you need to cover basic costs is the first step in understanding and managing your financial situation.