Having some sort of budgeting practice in place is crucial to guide you on your journey to financial independence. Today I’m going to share a really easy budget that I used when I first decided to take control of my financial situation. Nowadays, I like to use a more detailed approach, but if you are looking for an easy fix that will help you keep your finances on track and achieve your goals, you have come to the right place.
The Magic Number Budget
What Is the Magic Number Budget?
What makes this budgeting technique great is that it is extremely simple, easy to set up, doesn’t require the use of spreadsheets, and won’t take up more than a minute or two each day. Additionally, as you are about to see, this is much simpler than most other budgeting techniques in that you don’t have to break down your expenses or keep track of them in detail.
The Magic Number Budget is based on the amount of disposable income you have after paying your bills and paying yourself. Your Magic Number is essentially your daily allowance; the amount of money you can spend everyday while making sure your bills are getting paid and your goals are on track. If this sounds confusing, it will all make sense in a couple minutes!
Step 1 – Find Your Magic Number
This is the key part of this budgeting technique, and the only calculation involved! The great thing is that you only have to do it once and adjust it whenever your income or fixed costs change, which is rare for most people.
- Start with your monthly take-home pay;
- Deduct all of your fixed monthly expenses (rent, utilities, subscriptions, loan payments, etc);
- Deduct the monthly amount you wish to put towards savings;
- Multiply the result of the three steps above by 0.9; and
- Discover your Magic Number by dividing up the rest of the money by 31 (the number of days in a month).
Step 2 – Track Your Daily Expenses
Once you have calculated your Magic Number, what you need to do is keep tab of your total spending each day and track the variation at the end of each day. For example, if your Magic Number is $40 and on the first day of the month you spend $26, you have a $14 surplus. Then if you spend $42 on the second day, your surplus has gone down to $12, and so on. As you can see, it’s very simple to keep track of your finances that way; as long as you finish each month at or above $0, all of your financial goals will be met.
What I did to keep track during the day was just to put the numbers in a note on the homepage of my phone. No need for descriptions or anything like that. Since I looked at my phone regularly anyways, it really didn’t take any additional time to type a number. On a separate line I would keep my tally for the month (i.e. the total surplus/deficit amount) and adjust that number at the end of each day, which took a minute or two.
Example of the Magic Number Budget
Let’s look at an example:
- You take home $1,900 bi-weekly, or $3,800 per month;
- You have $1,800 per month in fixed costs; and
- You want to save $600 per month for retirement and $200 towards a vacation.
- The above leaves you with $1,200, which we multiply by 0.9 to get $1,080.
- Dividing $1,080 by 31 days gives you $34.83, which we’ll call $34 for simplicity’s sake. $34 is your Magic Number – the amount of money that you can spend every day while meeting your financial goals.
A Budget That Provides Flexibility…
Those of you paying attention may have noticed four features built into this budgeting technique to provide for some flexibility:
- Step 4. sets aside 10% of your income as reserves for large, one-time expenses that may or may not be expected;
- Each month has four weeks on the income side (i.e. two bi-weekly paychecks);
- Every month has 31 days; and
- The daily allowance is rounded down to the nearest dollar.
While they are barely perceptible in your day-to-day budget, these features do add up quite a bit over time to give you some wiggle room. In fact, based on the example above, these buffers would leave you with an extra $5,790 per year available for large purchases, unexpected bills, or simply to add to your savings (perhaps to begin building an emergency fund).
…And That Checks All The Boxes!
The Magic Number Budget, while being extremely simplistic, also checks key boxes:
- The budget makes sure that your bills get paid;
- It focuses on paying yourself first and ensures that you are progressing towards your financial goals;
- It establishes clear boundaries in terms of what you can or cannot afford; and
- It provides you with a sizable buffer, which you can use to build an emergency fund.
Final Tips for the Magic Number Budget
Before leaving, here are a few more tips I would offer if you’re planning to give this a try:
- Stay well under your daily budget on regular days so that you have room to go over when you need to (and you will sometimes – especially if you do most of your weekly shopping on the same day or like to go out on weekends, for example);
- Try to start the month with a few consecutive days of near-zero spending – this will give you a nice little cushion when you want to splurge on something;
- Try never to take your balance too far into the red early in the month – it sucks playing catch up;
- Finally, enjoy life! Budgets should not be about feeling restricted, they should be liberating! You can feel relieved knowing that your financial future is taken care of so long as you respect your Magic Number. Now go and find ways to make the most of that daily allowance ?