In previous posts, I have advised that people look at all of their finances to really get a handle on their actual financial situation. To put my money (so to speak) where my mouth is, I have, of course, done the same. When I did so, the most amazing thing happened. I sat down with my husband and showed him the finances. I have been the one who has taken care of all the bills, and he was the one who never understood why money seemed so tight. But after I pulled the finances together, I showed him where our money goes. It was a great exercise to figure out all our monthly bills and our other spending and figure out how to change our financial situation.
In fact, I have come to believe that doing so is absolutely essential as a first step toward taking control over money. However, some people feel overwhelmed by this. This post will show you the basic categories of expense and a simple method for tracking your own personal expenses. For a list of general categories, click here.
The first category of expense might be seen as fixed (or semi-fixed) expenses. These are expenses that you have committed to and which are not going to change in the near future. The biggest is most likely your housing expense which includes mortgage or rent along with property taxes and insurance. Then comes all the rest of the debt: home equity loans or lines of credit, student loans, car loans, credit card debt, store debt, and other personal debt. Although the amounts may fluctuate a bit monthly, for the most part, this is money you have no choice but to spend because it is already spent – you are just paying it back.
After debt, there are other semi-fixed monthly expenses that you may or may not be able to change: these include insurance such as health insurance, life insurance, disability insurance, flood insurance and vehicle insurance. In addition are utilities: home telephone, cell phone(s), gas/electric/oil (energy), cable, internet service provider, etc. Other expenses, which are far more discretionary, can include home maintenance (lawn care, cleaning service), transportation expenses (gas, train tickets, tolls, etc), costs associated with work (union dues, clothes, cleaning, supplies, lunch, etc.). Many of us also have discretionary expenses that are monthly such as subscriptions for newspapers and magazines, health club fees, dvd rental plans, water delivery, etc. These expenses can often be cut without too much impact on your life-style; it depends on your personal priorities. Another major expense, which can be reduced, is grocery and drug store items, and hobby-related expenses for you and your children (such as my daughter’s voice lessons).
You might also spend money on education for either private school tuition, college tuition, books, supplies, and/or lessons. These may or may not feel discretionary to you. If you work and have young children, you are also probably spending money on day care. You might be helping to support others – your own children or some other family member. There are also sometimes what I like to think of as “seasonal expenses” such as for clothes and shoes, vacations, car maintenance and upkeep, personal grooming, or even “one-shot” expenses like vehicle registration (every other year where I am), gifts, charitable donations, doctor, dentist, eye care, etc. Some of those are very discretionary, while others are absolutely fixed. You need to look at everything.
The last, and far more elusive type of spending, is cash. Where does all the cash for the week go? You’ll need to get receipts of everything you spend to figure that out; however, that money seems to be the least important when we budget but the easiest kind of spending we could cut down if we choose to become aware of it. One example is the lottery or other “vices/habits/random spending.” My husband or I often came home with scratch offs or lottery tickets and we never thought about how much we spent on that. I did some quick calculations and figured we might have been on the road to a $2,000.00 per year “habit.” We had no idea. Now, I do like having a lottery ticket, “hey, you never know,” as they say around here. So, I looked into a subscription. Now, I pay $196.00 per year and that is it. Will I ever buy an extra ticket or a scratch-off again.? I do not think I will buy a scratch off, but I may buy a mega-millions here and there. But now I know; before, I did not even notice that money being spent.
The best way to figure out what you spend monthly is to allow yourself a month to let the bills roll in naturally. You can then organize your finances, figure out your “fixed” expenses, and begin to look at your more discretionary expenses. You might be able to lower some of the seemingly fixed expenses such as debt and insurance. You can ask your creditors to lower your interest rates or look into alternative insurance products or whether you are covering more than you need to be covering. You might be able to lower some of the more discretionary items by deciding whether or not a service that you employ (lawn care or house cleaning) is worth paying for or doing yourself. You might be able to lower your grocery bills by buying in bulk, setting limits, using a list, clipping coupons, etc. You can definitely lower your spending on non-essential items simply by not buying them (although, as I have said before, this is easier said than done).
Once you have the information, do not let it go to waste: create a written record of your expenses so that you can see where cuts can be made. We decided to create a record on Quicken; however, a good old fashion ledger, or even a notebook, can serve this purpose just as well. Once it is written down, you can decide where to make changes that you feel will have the least impact on what you believe is important to you and your family. For us, it was a lot of wasteful spending: a dvd rental program that we really do not use much, getting take-out or delivery, buying coffee on the way to work when a perfectly good pot is sitting at home. Those are little things, but, the really big issue that we uncovered is that we are carrying too much debt, and, by giving up the little things, we can lessen that debt much more quickly than if we kept wasting our money in these ways.
I recommend you go slowly: if you are like us, it is a bit of a shock to find out that what you thought was a decent salary for hard work is not going as far as you had hoped. Not only does the government take a huge piece of your pay, but, you are probably giving it away in lots of ways that are not productive for your financial health. By looking at that now, you can save yourself some stressful times later. Some people might advise you to go further and really cut back everything; because we are newly conscious spenders, right now, we are trying to gain more awareness of our habits: over time, we hope to make even more significant changes. Also, for us, there are some things that are more important than reducing debt and accumulating wealth; obviously, we will continue to pay for those things. But, we have been stunned to learn that we are also paying for things that we do not find more important than reducing our debt and gaining wealth; those things have been cut.
After looking at all of our
"expenses," it was no wonder we always felt like we never had any
"extra" money. We didn't. We were bringing in enough
after taxes to just keep up with all the bills; thus, it was important to
change our spending in as many ways as we could think of and as quickly as
possible or we were going to go deeper and deeper into that hole of debt from
which we might not poke back out. For us, that meant changing our
relationship with money to take control over our money rather than allowing it
to take control over us; however, creating a list of expenses and honing that
list, along with creating a plan for eliminating our debt and cutting our
spending, has been a tremendous push in the direction we wish to go: toward gaining control over our money
and gaining wealth for all of our hard work.