Your partner is trying to plan their finances for the next five
years. They come up with a model that expresses the amount of
liquidity they have in terms of various expenses (rent, food,
education, utilities, etc). How can you determine the costliest and
cheapest expenses? Describe the steps.

Step 1: Figure Out Your
Goals

What are your dreams for the next few months? How about the next
few years? Are you planning to further your education, get a new
car or buy your first house? Write down the plans that are the most
important to you, along with a realistic guess of how long it will
take you to get there. Keep this list handy, we’ll return to it in
another step.  

Step 2: Calculate Your Income and
Expenses

In a budget, your monthly income is the amount you take home in
each paycheck (not your total annual salary), as well as other
amounts you may receive regularly, like freelance income,
investment dividends, interest and child support. That’s what
you’ve got to spend. Next, add up your regular monthly expenses.
Include the cost of housing, utilities, childcare, phone and
Internet service, food, student loans, insurance, and
transportation or commuting costs, and any other regular bills.
Next come the discretionary expenses, or those that are optional or
flexible. Your discretionary items include entertainment, dining
out, vacations, hobbies, etc. Don’t forget to anticipate costs that
aren’t monthly but pop up regularly, like car maintenance, home
repair and holiday spending. To refresh your memory, review your
bank statements and receipts to identify expenses you may have left
out.  

Step 3: See What’s Left

Once subtract your monthly expenses from your monthly income,
it’s time to decide how to spend what’s left. Look back to the
goals you identified in Step 1. Let’s say your income is $3,000 a
month and your expenses are $2,600. With the remaining $400, you
could save $100 each month for a new home, and deposit another $100
in a tax-advantaged retirement savings account. Whatever your
choices, your budget can help you take control of your financial
future.

If your monthly expenses are more than your monthly income,
you’ll need to revise your spending habits so you can live within
your means. Review your list of discretionary expenses and see if
it’s possible to cut back by, say, eating out less or spending less
on vacations or costly hobbies. This type of assessment and
spending readjustment can help you enjoy the money you have without
worrying about running up debt.   

Step 4: Monitor Your Budget

Your income, expenses and spending habits will change over time,
so it’s important to monitor your budget. Ask yourself:

1. Am I still following it?
2. Are there any revisions needed based on other changes in my
   life?

The overall goal is not to worry about everything you spend, but
to be aware of how much you have available to spend. That said, as
an experiment, consider tracking all your spending for one week, or
even a month. You may be surprised by what you find and spot some
easy ways to cut costs.