Do you know what financial level you are living at? Are you living close to the bone, or are you living freely, with all of your needs and your wants being met? And how do you know?
When clients come to me to get their finances under control, one of the first things I do is help them to understand their “Bare Bones Number.” My mentor Luna Jaffe likes to call it the “Squeak-By Number,” because it’s the number that you would be just squeaking by on. It is the minimum amount of money you could spend every month, to just barely get by.
It is helpful to know your Bare Bones Number, because then you are aware of how much you could cut from your life in an emergency, if absolutely everything went wrong, what would you be left paying? And it is very useful to have this as a calculated number, because it gives a sense of peace and control to know what you could cut down to, and still live. It also shows you whether you are already living Bare-Bones or not. A lot of folks think they are living at the absolute edge of their expenses, but we often find that there are still places that you can cut expenses, sometimes with little to no effect on your quality of life. We get so used to the amenities and experiences in our lives, sometimes it ends up feeling like those are necessities, when in reality, they don’t really belong below the Bare-Bones line.
Take out a piece of paper (or a spreadsheet, if that’s what you like), then go through all of your bank statements for ALL of your personal accounts including your credit cards, for the last two months. For every charge decide, ask yourself:
Was this necessary for my most basic living?
Some things are easy. Your utility bills are one that is obviously Bare-Bones. Also minimum debt payments are another. You must keep up with your debt payments, because the consequences of not doing so can be dire. Things like rent, though, are deceptive. It seems Bare Bones, but is it really? Are you living in the smallest house or apartment you could be? Would it be possible for you to move somewhere cheaper, and still be happy and comfortable? We Americans live in huge houses, maybe a smaller apartment wouldn’t be as much fun, but it may serve your Bare Bones Number little better. The same goes with groceries. Bare Bones doesn’t mean organic. It means the cheapest you can get away with and still be relatively healthy.
As you go through your statements, write down the items that you decide are Bare Bones on your paper, and write down how much you spent in one month for that item. When you are done, you should have a list of items that you can total up. That total is your Bare Bones Number. Now ask yourself:
How does this number make me feel?
Does it seem too high? Is it too low? How close is your current living situation to your Bare Bones number? This exercise can bring up all sorts of emotions. Perhaps you are distressed at how high the number is, or how close it is to your current living situation. Or maybe you have realized that you can live on even less than you ever thought you could. What a feeling of freedom, knowing you can cut way back, and still survive!
No one will have the same Bare Bones number. We all live different lives. Perhaps you have medical issues that others don’t, or you have kids. Or you live in an expensive city. All these things can effect that number, so it’s not helpful to compare your number with other people’s. But what can be helpful is revisiting this number over time, every six months or so. Our own lives change all the time, so your number will probably change, too.
How can you use this number?
I’m not advocating you make it a goal to live at your Bare Bones Number. It is actually the opposite. Once you know what your Bare Bones Number is, and if your income is significantly over that, then of course you can add in the things that make our lives full and rewarding.
If you are living well, and have a good job, just knowing your number can help you understand how much you need to save for an emergency fund. Many people advise having at least 6 months of expenses saved. Now you can take your Bare Bones Number, multiply by six, and know how much is a fairly good Emergency Fund goal.
If you are already living close to your Bare Bones Number, this exercises often brings up areas where you can cut even further. If you cut just a bit more, you might be able to buy yourself some breathing room, while you use other methods to also improve your financial situation.
Sometimes you may find in calculating your Bare Bones Number that your expenses are larger than your income. My next article will be about what to do if you find yourself in that situation.