I have said it before and I will say it again and again and again, START A BUDGET! I have wrote a post on a generic budget breakdown that Sam and I use, if you have not read it, check it out. This post is going to be about the perks of tracking spending and some tips on how to do so.
Here are 3 quick things tracking your spending can help with.
- Shows you where your hard earned money is going
- How much money you are spending in regards to your income
- It can help with the trickle up affect
Lets break them down a little bit for better understanding.
First, look at every transaction you make. There will be a bunch of random transactions, such as rent, mortgage, utilities, insurance, vacation, food, car payment, toy payments, fun, household items, etc. Then try to categorize them into as few of categories as you can, I have 8 major ones listed below.
Once you have your categories, add all transactions into their respectable category, then add it up. How are you standing? Are you living within your means? Are you saving money every pay period, are you living paycheck to paycheck, or are you upside down and spending more than you make? Once you know where you are standing, do you need to lower your expenses, could you add some expenses, or maybe you just want to see how low you can go? You can then start analyzing every transaction, compare them with other options, and get a sense of how much you are spending currently, compared to what you could be spending, if you made some changes.
Here are some examples of what you might notice with spending.
- If you look and you are spending too much money on coffee at Starbucks every morning, start using your coffee pot, that could save you $5 a day.
- Maybe you spend a lot of money on tools with the idea that the tools will pay for themselves, with the money you save by being a DIYer. Think of how crucial that specific tool is you are buying, how often are you actually going to use it? Is there someone you could borrow the tool from? Do you need that expensive of one, could the off brand tool do the same trick as the name brand one? If so, maybe that is the option you should go with. My favorite question is, can you do the work without it, if so, put it off for a week, finish the task at hand, and see how long you can make it without upgrading.
- Maybe you notice you are spending $450 a month on a car payment, along with $120 a month in full coverage insurance. Maybe this is a large portion of your income. You could sell the car, buy a $2-5k dollar car with cash, then get liability insurance for $30 a month. If you spent $5k on a car, you would break even in under 10 months and then you will be saving $540 a month.
- Say you live in a $250,000 house and you put 3% down to get into the house. You may have a monthly mortgage payment of $1022, HOI of $66, property tax of $406, and PMI of $150, for a total mortgage of $1,644. On the opposite side, say you bought a house for $150,000 with 3% down. You could have a monthly mortgage payment of $613, HOI $66, property tax of $244, and PMI of $90, for a total payment of $1,013. This is a difference of $631 a month! Examples above are based off of a 3% interest rate.
Once you have analyzed your spending, make a plan to get to your goal expense to income ratio. My personal expense to income ratio is 60% of my salary. I use 60% of my salary for expenses, 30% for investing, and 10% for vacation. I do so by giving myself a pay period allowance for each category. I have it broken down where all my expenses fit into 60% of my salary and I have to make it fit within that. No matter what, I do NOT exceed my percentage and you should not either.
Lastly, the trickle up affect. This is where finances become a game! See how far you can go with this, see how many days you can go without spending money. This theory is if you start with small expenses, like a cup of coffee, you will progressively say no to more and more expense. For example, you start by saying no to the coffee every morning, you see the savings that gives you and you get excited. Next, you are at the store and see a sweatshirt you like but do not need, and you do not buy it because you are thinking of the savings it can cause. Next, your car is getting out of date and you are at the dealership looking to buy a new one. You see you will add a $300 a month car payment along with an increase in your insurance by $80 a month. You think of the savings you could have by not buying that car and you decide to embrace having an out of date car. Then you are looking at buying a house instead of renting, you start looking at houses between $100,000 – $300,000. You analyze each deal to see how much you will pay a month dependent on how much you are willing to spend. You decide to purchase a house for $150,000 instead of a more expensive one.
This trickle up affect is a great tool to keep your expenses down, stay out of debt, and to live way under your means.
If you made it to the end of this article, you have already started, or are more than capable of tracking your spending successfully!
Your Life Tutor