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Sometimes financial advice makes assumptions that can stop people in their tracks if they’re new to budgeting and managing their money. One of these is an assumption that people know their baseline spending amount or that their spending is the same every month and then work from that number to calculate how much to save for emergencies.
In reality, not everyone understands their numbers enough to know how much savings they need based on their monthly baseline. In this article, we’ll walk you through how to calculate your baseline spending and then, once you have that number as a starting point, we’ll help you calculate what constitutes “enough savings.”
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What Is Your Personal Spending Baseline?
Finding your baseline simply means understanding how much you spend each month. Follow these steps to calculate your personal spending baseline:
Add up all bills: Bills are typically similar each month, so this is a good place to start. Include things like housing, utilities, cellphone, vehicle payments, etc.
Add up living expenses: Living expenses include things like groceries, gas, clothing, activity fees, etc. These may be similar each month, but there’s more flexibility in these categories than in the bill category. If you’re not sure how much you spend, you can look through previous bank statements or keep track for a few months to get an average.
Add up discretionary spending: Consider how much you spend on things outside of basic living expenses. Include travel, entertainment, shopping and self-care and use the same strategy as determining living expenses.
Once you have all of these numbers gathered, you’ll have a good baseline of your monthly spending. From there, you can figure out how much you have to spend to survive each month and how much you want to put toward discretionary spending.
How Much Do You Need To Spend Each Month?
When you’re determining how much savings is enough, you’re looking for a number that you absolutely must meet each month. This includes all of your bills and basic living expenses. Once you know this number, you can work out a budget and savings goal that works for you. When you budget, you can lean more conservative if you’re willing to tighten up spending on groceries or activities or give yourself a bigger cushion if you want a more comfortable budget.
How Much Is ‘Enough Savings’?
The personal finance recommendation for savings is between three and six months of expenses. To calculate this, use the amount that you have to have each month to pay for bills and basic living expenses and multiply it by how many months you want to have saved.
For example, if you have to have $5,000 to pay for your bills and living expenses and want a three month emergency fund, $15,000 will be enough. For a six-month emergency fund, you would need $30,000.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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