How To Calculate Expenses (without needing a strict budget)

Calculating expenses might sound tedious or overwhelming, but having a clear system in place can make all the difference between constantly stressing about money and spending with confidence.

In this post, I’ll show you exactly how to calculate expenses using my Conscious Spending Plan—a method designed to help you live your Rich Life without obsessing over every penny.

Use my Conscious Spending Plan

The Conscious Spending Plan is a practical framework to help you allocate your money toward the things that matter most. It emphasizes awareness and intentionality, rather than restrictive budgets. Instead of tracking every dollar, you’ll divide your income into four broad categories:

1. Fixed Costs (50-60% of take-home pay)
2. Investments (10% of take-home pay)
3. Savings (5-10% of take-home pay)
4. Guilt-Free Spending (20-35% of take-home pay)

Let’s break these down even further to help you automate as much as possible and regularly review your spending patterns so you can stay in control of your finances without feeling deprive

Fixed Costs (50-60% of your take-home pay)

Your fixed costs form the foundation of your financial life. These are the essential expenses you need to live, such as rent, utilities, groceries, insurance, and transportation.

For someone earning $5,000 per month after taxes, fixed costs should ideally range between $2,500 and $3,000. This would cover your rent or mortgage payment, basic groceries, utility bills, cell phone plan, and other essential expenses. If you live in an expensive city like San Francisco or New York, your fixed costs might creep closer to 65-70%. That’s okay—the key is to know your actual numbers and plan accordingly.

To make managing fixed costs easier, set up automatic payments wherever possible. For example, schedule your rent payment to transfer directly to your landlord each month, set up auto-pay for utility bills from your checking account, and charge your cell phone bill to a credit card. This ensures your bills are paid on time and eliminates the mental load of remembering payment dates.

It’s also a good idea to do a quarterly audit of your fixed costs. Take a close look at recurring expenses to identify opportunities for optimization. For instance, you might negotiate a lower rate on your cable bill, switch to a more affordable cell phone plan, or adjust your grocery shopping habits to save hundreds of dollars each month. Small changes in your fixed costs can add up to significant savings over time.

Investments (10% of your take-home pay)

Smart investing is one of the best ways to secure your financial future. It’s about paying yourself first and letting your money grow over time. On a $5,000 monthly income, aim to invest at least $500 each month. The easiest way to achieve this is through automatic contributions to tax-advantaged retirement accounts, such as a 401(k) or a Roth IRA.

Start by capturing any employer match offered through your 401(k). If your employer offers a 5% match, contribute at least 5% of your salary to take full advantage of this free money.

Once you’ve secured the match, consider maxing out your Roth IRA contributions, which have an annual limit of $7,000 if you’re under 50 (as of 2024).. Setting up automatic monthly transfers of $500 makes this process effortless.

If you’ve maxed out your retirement accounts and still have funds to invest, consider opening a brokerage account for additional investing. Focus on low-cost index funds, which offer broad market exposure and lower fees compared to picking individual stocks.

Remember: the earlier you start investing, the more you can benefit from the magic of compound interest. Even small contributions made consistently over time can grow into substantial wealth.

Savings (5-10% of your take-home pay)

Savings provide a safety net for life’s unexpected events and help you achieve specific financial goals. On a $5,000 monthly income, aim to save between $250 and $500 each month. Your first priority should be building an emergency fund, which serves as a financial cushion for unforeseen expenses like medical bills or car repairs.

Ideally, your emergency fund should cover 3-6 months of essential expenses. For someone with $3,000 in monthly fixed costs, this means saving $9,000-$18,000.

To make your savings more effective, use high-yield savings accounts and separate them based on your goals. For instance, you might have one account labeled Emergency Fund and others named Hawaii Vacation, Home Down Payment, or Wedding Fund. Naming these accounts makes your goals tangible and reduces the temptation to dip into your emergency savings.

Guilt-Free Spending (20-35% of your take-home pay)

Guilt-free spending is the most enjoyable part of the Conscious Spending Plan. This is the money you can spend on whatever brings you joy, without any stress or guilt. For someone earning $5,000 per month, guilt-free spending could range from $1,000 to $1,750. Whether it’s dining out, hobbies, entertainment, or travel, this category allows you to indulge in the things you love.

The key to guilt-free spending is focusing on your personal “money dials”—the areas where spending more genuinely enhances your happiness. For example, if you love fitness, investing in a premium gym membership or personal training sessions might be worth it. On the other hand, cut ruthlessly on things you don’t care about. For instance, if designer clothes don’t matter to you, skip them entirely and redirect that money to what truly brings you joy.

To make tracking easier, consider using different credit cards for different spending categories. This helps you see exactly where your money is going while keeping your guilt-free spending separate from essential expenses. The beauty of this category is that you can enjoy it fully because you’ve already taken care of your fixed costs, investments, and savings.

Steps to Calculate Your Expenses

Here are a few steps to start calculating your expenses.

Step 1: Identify all expense categories

The first step to calculating your expenses is getting a clear picture of where your money is going. Pull up your last three months of credit card and bank statements to analyze your spending. Choose a tracking method that works best for you, whether it’s a simple spreadsheet or a budgeting app that syncs directly with your bank accounts like Personal Capital, YNAB, or PocketGuard.

Be sure to account for sneaky irregular expenses, such as annual subscriptions or quarterly insurance payments, by dividing these costs by 12 to get their monthly equivalent.

Step 2: Gather necessary data

Next, gather all the information you need to calculate your expenses accurately. This includes downloading bank and credit card statements, collecting all recurring bills, and reviewing investment account statements and current contribution levels. Check payroll deductions for healthcare, insurance, and retirement contributions.

Having all this data in one place makes it easier to see the full picture of your spending.

Step 3: Organize expenses

Organize your expenses into the four categories of the Conscious Spending Plan: Fixed Costs, Investments, Savings, and Guilt-Free Spending. Keep your categories broad and manageable to avoid overwhelming yourself.

Review your variable expenses carefully to identify hidden spending patterns. That $15 Friday night takeout might seem random, but adding it up over a month becomes a predictable $60 expense you should plan for.

Consider mobile receipt scanning apps like Expensify or Receipt Bank if you need to track business expenses or want digital backups of important purchases.

Breaking down annual or irregular expenses into monthly figures also helps you plan more effectively. If you’re unsure about which category an expense belongs to, err on the side of placing it in guilt-free spending and move on.

Step 4: Add up expenses

Once your expenses are organized, calculate the monthly totals for each category. Compare these numbers to the recommended percentages in the Conscious Spending Plan to see how your spending aligns with the framework.

Transform annual or irregular expenses into monthly figures by dividing the total cost by 12. For example, a $1,200 annual car insurance premium becomes a $100 monthly expense in your planning.

Pay special attention to any category that exceeds the recommended range, as this could indicate opportunities to optimize your spending or adjust your lifestyle to better match your income.

Step 5: Regularly review and update

Expense tracking isn’t a one-time activity. Schedule a recurring Monthly Money Meeting with yourself (or your partner) to review your spending patterns and make adjustments as needed. Use this time to ensure your financial automation systems are running smoothly, such as automatic bill payments and investment contributions.

You can download my Monthly Money Meeting Guide below to help you get started!

Common Mistakes to Avoid

One of the most common mistakes people make is obsessing over small expenses while ignoring major costs such as housing or transportation. That $3 latte isn’t killing your financial future.

Another pitfall is trying to manually track every penny, which can quickly become overwhelming. Instead, use modern banking tools and budgeting apps to handle the heavy lifting. Avoid creating overly complex tracking systems with dozens of subcategories; keep it simple and focused on your financial goals.

Finally, don’t overlook predictable but irregular expenses like car maintenance, holiday gifts, or annual subscriptions. Instead, incorporate them into your monthly plan to avoid surprises.

Setting unrealistic spending restrictions creates a cycle of guilt and failure. Optimize your big fixed expenses and automate your important financial goals.

Tips for Making Expense Calculations Easier

Leverage technology to simplify expense tracking. Use your credit card for most purchases to automatically categorize spending and take advantage of your bank’s built-in tools and mobile app for spending analysis. The automatic bill-pay features will help eliminate late fees and reduce the mental energy needed to manage your money.

Consider setting up separate checking accounts for fixed costs and guilt-free spending to keep your finances organized. For irregular expenses, create calendar reminders to ensure you’re never caught off guard. If you tend to overspend with credit cards, try using cash for certain categories to increase awareness of your spending habits rather than just tapping a credit card.

Why It’s Important to Calculate Expenses

When you understand your true spending patterns, you eliminate the constant stress and uncertainty of wondering whether you can afford something. This clarity allows you to make financial decisions with confidence, knowing that you’ve planned for both your needs and your wants.

Expense calculation also uncovers opportunities to optimize your spending. For example, you might discover recurring subscriptions or fees that you no longer use or need. Canceling these forgotten charges can free up hundreds of dollars each year, money that can be redirected toward savings, investments, or guilt-free spending.

Having a clear picture of your expenses enables you to scale your lifestyle smartly as your income grows. Instead of letting lifestyle inflation eat up every raise, you can make conscious choices about what to upgrade. Whether it’s moving to a nicer apartment, taking more vacations, or increasing your savings rate, the decision is yours to make.

Finally, knowing your exact monthly expenses strengthens your position in salary negotiations. When you can confidently state that you need a specific amount to support your desired lifestyle, you’re better equipped to advocate for a fair target salary.

Example of what can happen if expenses aren’t handled

It’s easy to procrastinate on managing your expenses, telling yourself that you’ll “get to it later”. But often, later doesn’t come until it’s too late, leaving you scrambling to deal with financial stress that could have been avoided.

I recently discussed this topic on my podcast with Don and Tana, a couple who struggled with their finances due to their high debt and lack of savings. Despite doubling their income to about $258,000 annually, the couple still faced challenges, such as a large debt load of around $387,000, which included credit card debt, a mortgage, student loans, and personal loans. They had no idea how to manage the extra money!

We talk about recognizing their scarcity mindset, the need for shifting perspectives on spending and saving, and aspiring for a balance that allows guilt-free spending while still planning for a secure future.

Get My Conscious Spending Plan Now

The Conscious Spending Plan (CSP) has already helped thousands of people transform their relationship with money. Instead of feeling guilty or overwhelmed about spending, you’ll have a clear framework that puts you in control. This comprehensive guide includes a complete walkthrough of the 50/30/20 framework, actionable steps for controlling your spending, and step-by-step automation guides to make your money work for you.

Don’t wait to take control of your finances—download my CSP today and start building your Rich Life.

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