Your Simple Financial Plan, Part 5- Know What You Spend
The best way to take control of your finances is to be smart with your spending.
Recognize Your Weaknesses
We all have them whether we admit it or not. Perhaps, impulse buys? Maybe you can’t resist sales or deals of the day? I have a bad habit of buying myself presents while I’m shopping for others. My husband hates to shop so I rationalize this by thinking I’m doing him a favour. In reality, it’s easy for this to get out of hand if I’m not paying attention. Last year, a few of my purchases to myself never made it under the tree because they were overload!
Think about your worst spending mistakes of the past and make a pact with yourself to not repeat them again. Are you too generous with your loved ones- that’s great if you can afford it. What about the purchases you’ve made in the past but never used? Like the clothes hanging in your closet for the last year with the price tags still on. Or the gym equipment collecting dust in the basement. How much did you pay in credit card interest last year from your holiday purchases? Wouldn’t it be nice to avoid that this year?
We are all human and make mistakes. Admit to your less than ideal behaviour and make a plan to change it. For the impulse shopper, it might be better to do your shopping on line to reduce temptation? Or when you’re in the stores, use cash instead of credit. Studies show that people spend less when they use cash.
Take Control With Your Budget
It’s tough to know what you can and can’t afford. It’s next to impossible without a budget! Here are three questions to ask yourself;
i) Can I support my current lifestyle with my level of income? ii) Have I planned for large purchases or cash flow challenges as best as I can? iii) Am I spending my money on things that matter to me and my family?
If it helps, review your expenses in the following categories:
1) regular fixed expenses- same amount every month i.e. rent or mortgage, utilities, insurance, child care etc.
2) periodic fixed expenses- one-time or irregular expenses of a defined amount i.e. gym, club or professional memberships etc.
3) variable expenses- a certain base amount is expected and necessary but the rest can vary substantially i.e. food, clothing, some home maintenance or car repairs etc. Everything in excess of the base amount needed to live is similar to discretionary expenses
4) discretionary expenses- Lifestyle or “fun” money that is not required to live but is always enjoyable. i.e.travel, entertainment, dining out, activities, hobbies etc.
5) capital- big ticket items you must save for that may or may not increase in value. Think home improvements, car, furniture etc.
It’s tougher to change 1) & 2), but often easier for 3)-5). The challenge is to make trade-offs and to know when the “cash crunch” time will come. Don’t get too hung up on the categories. Focus on understanding the choices and decisions you’d make if things don’t go as planned. The unexpected will always happen so having some resources to deal with it can really help.
One of my own tricks is to spend far more time planning my spending than actually tracking it. This process won’t work for everyone but it does for me. At the start of each year, I plan a very detailed budget- it helps me understand and remember what I must, can and want to spend money on. Then, I determine approx. how much is “fun” money after the fixed and necessary variable expenses are taken care of. Because I know this upper limit of fun money, I don’t get too concerned about how I spend it each month. This way, I am free to make choices depending upon what I feel is important at the time. I also closely monitor my TOTAL spending against my budget every month (rather than the detail). If I am way off, I investigate why and make changes. A “timing” difference in spending may not need much change but a “real” difference does.
I challenge you to find a spending and budgeting process that works for you and your family. When you do, you’ll feel good and know you’ve planned, as best as you can, for the inevitable surprises that life will bring!