Your spending plan

To make sure you’re maintaining a positive cash flow, what you need is a budget. When you create a budget, you slice your monthly income into chunks, allotting a portion to each type of expense you have. For example, you might divide your spending into expense categories:

It doesn’t make much sense to assign dollar amounts for each budget category arbitrarily. You should base your budget on reality. And the only way to know reality is to keep track of your actual expenses, preferably over at least two months. The hard part is tracking every penny. Try keeping a notebook on hand to record small amounts and collect all your receipts, credit card bills, and bank statements in one place.

At the end of the period, you’ll see how much you spent in each category, and you may even find some surprises. For example, it might be clear that if you ate at home more, you could afford to put away more money toward your vacation fund. Or you might decide once and for all to find a better deal on your phone, maybe by dropping the extra services you never use. Regardless, once you know how much money you actually spend on things, you can start to set spending limits and spending goals.

For example, the table below shows how you could cut certain monthly expenses that aren’t fixed (unlike rent and student loans). By reducing spending on phone, clothing, and eating out, you can more than double your saving. And that’s even after increasing your grocery spending to compensate for eating out less often.