How to Use the Bottom Line Method: Creating a spending plan that works

Over the years, I’ve refined my system called the Bottom Line method. Knowing your Bottom Line means that you know exactly how much money you need to live each month. You calculate this number by planning ahead for the year – assessing your needs and interests and determining how much you can reasonably spend on any given category of your spending plan. All the categories of your spending plan together total your Bottom Line.

I wanted to give an example to demonstrate how you might establish a category of your Bottom Line:

While everyone’s spending plan categories are a little different (this is where personal finance is personal), your categories could look something like this:

Housing (rent/mortgage)

Utilities

Household Items

Insurance (home/auto)

Health Insurance

Food

Cars

Clothing

Pets

Entertainment

Subscriptions

For this example, let’s take a closer look at the car category. If you own a car, the typical expense we think of is fuel. Let’s say that you fill your tank two times each month and each time you fill your tank, it’s $50. So, each month, you need about $100 for gas alone.

Gas is the obvious regular expense for our cars, but there are a lot of other expenses that we can reasonably anticipate to occur, even if they don’t occur every month. You will need windshield wiper blades, oil changes, filters, and tires in your car’s lifetime. You may also need new brakes, new windshields, and maybe even some cosmetic repairs.

Unfortunately, even though these are expenses we can reasonably anticipate and plan for, they often crop up and feel unexpected. So that doesn’t happen, or happens to a lesser degree, we can set money aside for these things within our car category. New tires can cost upwards of $800, so every month we might set aside $66 for tires ($800/12-months = $66). An oil change is something that you might handle once or twice a year and it can cost around $80 each time. So perhaps you decide to set aside $13 a month for these ($160/12). The other possible expenses might add up to another $600 per year, or $50 each month (I read an article estimating that car maintenance and repairs for a new car can total about $1200 per year, so these numbers aren’t far off).

I used to only think about the thing I knew I was going to need – gas. Thinking this way, I might have budgeted $100. But the reality is, these other things are going to happen, even if they don’t happen right now. I need to prepare for them now so I am not caught off guard when they inevitably happen .

Instead of only setting aside $100 for gas each month, I set aside money for gas as well as money for all the other things that will happen eventually. Those expenses plus gas makes my car category look more like $229 each month. (You’ll see I left off insurance and car payments – I would probably make these their own categories).

I used the car category for this example but you must do this for every category of your spending plan. This activity is a big part of the system I teach when we work together.

And, if you aren’t already tracking your spending, now is a great time to start. Tracking your spending will give you a foundation to help determine what costs might arise in any given category and you’ll be prepared to tackle them.

If we don’t do this work, we think, by way of mental accounting, that we have that money to spend on something else, when we really don’t. And if we do spend it on something else, we make these things, that we should be able to reasonably anticipate, feel like emergencies. It’s a great feeling to plan for an emergency, because when we do, it is no longer an emergency.

Take a look at your categories and see which ones you might need to review to determine whether you’re capturing the true costs. You might be surprised at how much your car, home, and other things in your life might be costing you holistically. We often only capture the sticker price of something, but the other costs, which often feel hidden, can really add up. Doing this work allows us to better understand whether we can truly afford something we have in our life, or whether we need to make changes.