You know how much you earn, right? Do you actually know how much you spend and on what? Really? Most people are in the dark. Whether you get minimum wage or are a top earner, the challenge is the same. We know what comes in but not where it all goes after that.
I’ve helped people get a grip on their cash flow as part of my life as a financial advisor. Here’s how to get a grip on your money while we all wait for the world to open up again.
- Get printed copies of your credit card statements and bank statements from January, February and March. It’s a simple, 3 month snapshot from mostly before we all sheltered at home.
- Get a pen and a highlighter (if you have some at home).
When I was young and starting out, you couldn’t get a credit card if you had changed jobs or address in the last year or two. You were considered ‘unstable’ credit. Now they practically hand cards out in the school yard. ‘Here kid, try some debt. You’ll love it!’ Additionally, we have lost sight of where the money goes because of spending method diversification. In investing, diversification is a good thing; it helps stabilize risk. In spending, diverse payment methods (cash, cheque, debit, automatic withdrawals, credit cards) muddy the waters so it’s harder to get a clear picture of your spend.
Let’s get back to those statements, pen and highlighter.
We’re going to divide everything into 9 categories first. Go through your statements and with your pen, categorize every single expense.
- Housing Expenses (HE)
- Utilities (U)
- Transportation (T)
- Health Care (HC)
- Financial Obligations (F)
- Debt Repayment (D)
- Food (F)
- Recreation & Education (RE)
- Daily Living (DL)
Okay, now grab your highlighter.
Highlight rent or mortgage, condo fees, utilities, phone & internet, car payments, insurance (home, auto, life, critical illness, disability, etc.), student loans, banking fees, personal loans, and any other FIXED expenses. These are the things that you absolutely MUST pay every month for survival. (No, this is not the place for monthly billings like magazine or app subscriptions because you could probably survive without that if you had to.)
What is left are the variable or discretionary expenses. Those of you who want to highlight the other items with a contrasting colour – go for it.
You can take some time to put all these expenses in their categories on a spreadsheet if you’re comfortable with Excel or Word tables. Now add up what you have highlighted as fixed expenses.
What�s left? This is the money sieve. Don�t beat yourself up. Just observe. We lose track of where our money goes each month to this spend. You�ll find you have Christmas gifts here, drive through snacks, restaurants, groceries, clothing, cigarettes & alcohol, and all manner of �other�. Some of your expenses will be annual (licence plate & driver�s licence renewal, Christmas gifts) and some will be monthly. If you want to get a clearer picture, fill in other expenses you know will be part of your financial picture. Ensure you divide your annual expenses by 12 so you end up with a clear monthly picture of how your cash flows.
Why do all this? Sometimes it is eye opening to find out how much we spend on the �other� things. How many �other� purchases take the money away from your goals?
What�s next? Decisions.
What goals do you have that require money? Why do you want them? How important are they to you?
- A child�s education fund
- A home purchase
- Safety nest egg in case another coronavirus hits the planet?
- New bicycles for the entire family
The purpose of this exercise was to find out where the money has been going. Do your earnings go to your desired goals or shiny objects? You now have better vision on that. Shining a light on our habits allows us to decide if we want to continue as we have or change our habits to pursue a goal.
Let’s Start A Conversation today to discuss how these changes are affecting your financial future.
Submitted by Julie Muir – Founder and President of Podium Prosperity Group.
This article is provided for information purposes only. Although the content is believed to be reliable when posted, Podium Prosperity Group cannot guarantee this information is current, accurate or complete and does not assume any liability. The information is not intended to provide any insurance, financial, legal, accounting or taxation advice and should not under any circumstances be relied upon without consultation about your specific situation. The information is subject to modification and updating from time to time without notice.