Here Today, Gone Tomorrow? Learn to Analyze Your Spending
1/2/2014 11:52:07 AM
When it comes to “budgeting,” many find it right up there with dieting and root canals in terms of the pleasure factor. However, tracking your spending and disciplining yourself to live within your means and save for the future is definitely worth the effort. If budgeting is not a natural bent for you, don’t give up on the idea altogether. You just need a willing attitude and some good resources to help you stay disciplined and on track with your finances.
How do you stay on top of your financial game?
The basic report you should complete (on at least a quarterly basis) is a cash flow statement. This report tallies your income and expenses in several key categories. It’s the surest way to see whether you’re living within your means and where your spending may be excessive. After subtracting all of your expenses from your income, you’ll see whether your net cash flow for that period is positive or negative. Remember, the goal is positive, positive, positive!
There are many online tools to help analyze your cash flow (e.g., www.quicken.com and www.mint.com). In the past, analyzing cash flow was a lot more work—you had to save your receipts and organize them manually. But nowadays, if you use a debit card and checks for your purchases and bills, and you link your bank account to your online budgeting program, it will automatically categorize your spending and indicate where your money is going. It will even send you an email in the middle of a month to let you know if you’re over budget in a particular category (it knows if you’ve been bad or good)!
Even if it's just a 75-cent daily newspaper or a $3 latte as you head to work each morning, make sure you account for every single dollar you spend. That’s how you can see exactly where your money is going. You may be surprised when you look at your spending after even just a couple of weeks. The nickels and dimes add up!
Analyzing spending and developing budgets are great skills to develop in the young people in your life. For young adults just starting out, tracking their spending will help determine how much they can afford for rent/housing and a car, significant expenses each month. How much should average living expenses cost? The following are typical expenditure categories and the rough percentages each should represent:
- Housing/rent (includes utilities) 30-35%
- Household/personal items 20
- Autos/transportation 10
- Charitable giving 10
- Savings and investments 10+ (not an expenditure per se)
- Entertainment and leisure 7
- Debt/loans 5
- Insurance 5
- Miscellaneous 3
While the above percentages are ballpark figures (and they do change through life), spending more than five percent above these levels is getting “up there,” with the exception of savings and investments and loans for new college grads. It’s also important to reflect periodic expenses like gifts and vacations in a budget. Holiday spending tends to spike in December, as does vacation spending in the summer. Therefore, it pays to update statements on a monthly or quarterly basis to avoid underestimating expenses. Compare actual spending to these ballpark figures, and you’ll have a good sense of whether you’re overspending in particular categories. And, take special precautions against buying too much house or car—these fixed expenses get many people in trouble.
Wise financial planning requires knowing where your money goes. You’ll make better financial choices, build a stronger credit rating, and develop good savings habits that help build wealth.
Do you track and analyze your spending? How do you do it? Have you trained and modeled this to the young adults in your life and, if so, how? We’d love to hear your insight and experiences!
Tagged as: finances, financial literacy, net worth, debt, wealth, National Financial Wellness Month, life skills, credit rating, cash flow statement, spending, budgeting
Thanks for sharing this really important concept. Someone convinced me to track every expense when I first went out on my own. Even though that only lasted a few years, it left me with a habit of being attuned to the cost of everything and the rate of outflow (some in my family might say too much so!). I see many fully formed adults who never got this, and most of them seem to flirt (or worse) with insolvency every time a "rough patch" comes along.
Another thing I found very helpful, much more recently, was to break monthly budget categories down into fixed (e.g. mortgage pmt), essentially fixed (e.g. $400/mo. "groceries &gas") and discretionary (e.g. vacations), expressed in a spreadsheet monthly, quarterly and annually. This data, along sides assumptions about income, really cleared things up and actually helped me spend more than I would have. This was because it enabled me to see how little a one time, several $K vacation, which doesn't have to recur if one's financial situation deteriorates, moves the needle on our financial security, versus, say, a big car payment every month all the time or a bad latte habit. It's the luxuries and indulgences you let become necessities that make it hard to live within one's means and accumulate a buffer over time.
Keep up this good and important work, Dennis.
Reply by Dennis Trittin - 1/22/2014 6:31:01 PM
Couldn't agree more, Tom. Fixed expenses and seasonal/episodic expenses can really get us into trouble depending on how we categorize and budget. Interesting how most corporate bankruptcies happen when companies have high operating and financial leverage. They can't handle the tough times. Thanks so much for sharing! Den