Living Margin Budget

Something amazing happens when you decide to set aside money for yourself and make it more important than all the other things that need to be paid for. The living margin strategy focuses on giving and receiving.

The concept is simple: every time you’re paid, the first thing to do is set aside a percentage of your cash flow into what we’ll call your first fruits account. You do this before you pay for housing, transportation, and other bills.

If you’re having trouble with cash flow and you want to create a margin in your personal finances, the first thing you’ll do with your first fruits account is to build a cushion. With a cushion, you can feel more comfortable putting your first fruits, giving and receiving on autopilot. And with this mini emergency backup, you will worry less, spend less time managing cash flow, and save yourself from emotional decisions.

A cushion in place will help you protect against minor cash-flow fluctuations, whereas your “holding account” protects against significant, unexpected expenses or cash-flow loss. Your cushion should be roughly 10% of your monthly and/or annual income.

If your income or expenses vary from month to month, or if you don’t want to worry about your bank balance very often, a larger cushion is in order. And yes, you should have a bank account cushion even if you’re in debt. But keep your cushion no larger than necessary. Then, funnel all extra cash flow to your “holding account” or to pay off your debt.

You can’t thrive for long by spending more than you take in. But how do you decide what’s important and where to spend most of your money? If your expenses outpace your income, what can you do? How do you plan for and cope with significant unexpected expenditures?

For all these questions, a budget is the answer. By following this method and budgeting your cash flow every month, you will know exactly where it’s going. With the living margin budget, you build your spending plan around savings goals instead of fixed and variable expenses.

According to many budgeting experts, cash flow without allocation will likely be spent, often carelessly. If you have little or no cash flow left over at the end of the month or want to save more, the living margin budgeting strategy can help.

If you earn the same amount of money every month, creating a margin in your finances will be easy. When creating your budget for the upcoming month, you will add the cash flow you received during the month and make your next month’s budget based on that figure.

Since the living margin budgeting strategy uses last month’s income to pay this month’s budget, irregular income is also compatible with this budgeting style. Add up your net income from the previous month to determine how much money you must work with this month.

You’ll notice that months with lower earnings will squeeze your budget to its breaking point. Use these months to determine if you have any fixed or flexible spending categories that could be reduced or eliminated. Your flexible or discretionary spending will offset any shortages.

Months with higher earnings should make the following month an easy one when it comes to your budget. Any surplus can be allocated towards your savings, debt repayment, or spent on something you want.