Budgeting Basics - Step 7 - Allocating the Surplus (Margin)

When you have a realistic list of income and expenses that has income higher than expenses, you next need to allocate that extra income. It's tempting to use that extra money for spending on things you want to do but haven't budgeted for. In a way, that's what we're going to do, but not as free money.

You need to have a nest egg, some money put away for emergencies. To start with, you need to get $1000 put away that can be used to cover those totally unexpected expenses like a plumbing repair or bail. 

:-)

Some of you will say, "That's easy! Already have that!" Those people can read on after this paragraph. Some of you will say, "That's impossible!" No, it's hard but not impossible. It requires you to take every dollar you can scrape together and put it aside in a safe place and not touch it except when you have an actual emergency. It means you have to do without some things you would really like to have. But it *can* be done, and it *must* be done. Emergencies come along whether we want them to or not, and you must have money available to deal with them.

Once you have your $1000 saved, it's time to think of big expenses that come along periodically that aren't really unexpected. You know that appliances will break and need replacing, so you should plan for that. Some of your surplus needs to be saved so you have money to pay for the new appliance or the repair. You know that your vehicles will need repairs periodically. You know you need to do maintenance on your home.

Make a list of these sorts of items. You can even include vacations and other "fun" things here. Put down next to each item how much money you would like to have on hand all the time to cover that expense. For instance, you might want to keep $700 or $1000 on hand to cover an appliance repair, and probably at least $500 for auto repairs.

Now take the surplus amount of money that wasn't needed for your more regular expenses (listed as Cash Flow Margin on the spreadsheet I shared), and start applying it to those categories. You might make jars with labels to keep in your house, or you might have separate savings accounts at the bank, or you could put the money in your main savings account and keep track of how much belongs to which category. You might have only a very small amount to put towards these expenses, but if you put it faithfully where it belongs, you will eventually reach the amount you specified. Then you can start putting that surplus into another category.

If you have reached the amount you wanted for each of these extra categories, start putting the surplus into your emergency fund. You actually need enough money in your emergency fund to cover 6 months of living expenses!

And when you have to spend some of the money you've put aside in these funds, use the surplus to start replenishing the category you had to pull from.

Back to the Beginning