Your Lifestyle Gap: The Budget Number You Need To Know

If you are trying to focus more on managing your finances better, understanding your lifestyle gap is an important number for you to know. 

Calculating my lifestyle gap allowed me to not only be able to pay off over $21K of student loan debt within 11 months but helped me to save more towards areas such as travel and remove or decrease expenses. 

Here are some tips for calculating your lifestyle gap:

1.     Income Sources: One of the first steps to begin budgeting is to list all your income sources. This includes any 9-5 income and any additional sources which may derive from business earnings or even side hustles. Being able to identify all your income sources helps you to understand exactly how much money you have to work with on a monthly basis.

2.     Calculate Bills and Expenses: As always, I remind individuals that a list of bills alone is not a budget, since you also spend money on additional things throughout the month, you must include those expenses as well when you are trying to calculate total monthly expenses. Bills are typically considered as fixed expenses, but calculating your variable expenses provides an even deeper look into your finances. Variable expenses can be things such as: Gas, Groceries, Entertainment, Restaurants and more. This number can help you to answer questions such as: Do you need to allocate more to areas such as personal spending or fun money? Do you need to work on reducing bills such as your monthly phone bill or is your rent too high?

Now, you may be wondering, if I do complete those steps mentioned above, how will I know what my lifestyle gap is? This is a great question!

To be able to calculate your lifestyle gap, you need to take the totals in #1 and #2 and take the difference between the two. As an example, if your total income = $2,800 and your bills and expenses = $2,150, you have a total of $650 as your lifestyle gap.

Once you’ve calculated your lifestyle gap, you will be able to allocate these funds to areas within your monthly budget such as towards a current financial goal. Let’s say you are trying to pay off your credit card debt, you may decide to allocate an additional $300 from your $650 lifestyle gap, towards the principal balance of your target debt (Bank of America Credit Card).

Your lifestyle gap can help you to see big picture if you do have additional money to put towards things outside of bills and other monthly expenses. If your lifestyle gap does not provide you with much wiggle room, your next focus can possibly be to finding ways to increase your income further, in addition to decreasing some expenses that you may not necessarily care for!

Take some time out today to calculate your lifestyle gap so you can begin making steps towards managing your finances better!