At the end of a nice dinner out with good friends, when the check comes, my friends and I will sometimes play a game. Who can guess what the total bill is? The person whose guess is furthest away has to pay. While it seems simple to trace everyone’s orders and reasonably estimate the cost per meal, you inevitably get a wide range of guesses. Therein lies the problem with personal finances, it’s hard to estimate how much you’re spending vs. what you’re actually spending.
With the advent of saved payment information on different retail accounts across the web, one-touch purchasing is less of a decision and more of a reaction. Companies like Amazon, Eat24, iTunes, and Uber have my credit card stored and I routinely make a purchase through these platforms with just one touch. I barely register the fact that a purchase has been made and money has been deducted from my account.
This user friendly experience is accomplishing exactly what these companies want; for users to spend more money. But this simple user design can wreak havoc on your personal finances. As you habitually press for purchases without thinking about the costs, your credit card bill quietly swells. Before you know it, your entire paycheck is gone.
Your financial health is important. If you don’t know where all your money is going, it’s time to sit down and take a closer look. How can you determine if you’re leaking money in unexpected places? What can you do to stop the bleeding and start saving more money?
Start With Your Monthly Budget
To determine where you’re leaking money, you first have to determine what your monthly budget is. What do you expect to pay for necessities like rent, food, transportation, and utilities? Unfortunately, these are must-have things and everyone has to pay them.
If you’re fortunate enough to earn an income that can supporting savings, make your goals clear by writing them down. Add your monthly savings goal to your budget for the month.
Any money left over after your basic needs and your savings goals is disposable income. Break this amount down into different categories and estimated spending. For example, you could set aside $150 for dining out, and another $100 for new clothes.
Now that we know the best case scenario for your money, let’s see what’s actually happening when you bring out your credit card.
Compare Your Budget Vs. Actual Spending
Your next step to determining where you’re leaking money is review your total spending each month. Gather up your credit card and bank statements to see how much are you spending a month. What’s the difference between your budget and actual spending habits?
This part is like guessing the final restaurant bill with your friends. How much are you actually spending a month? It’s easy to create a budget in a spreadsheet and allocate X dollars for social activities and X dollars for restaurants, but how closely do you follow that spreadsheet when you’re living life? Maybe you’re a rockstar and hitting all your financial goals. Or you could get a big surprise by your actual spending habits.
Whether you’re living within your monthly budget or not, it’s good to know the reality of your total spending. But now we have go a step further to diagnose the problem.
Break Down Your Spending
It’s time to break down your spending habits. Different programs and apps can easily categorize your spending so you can see where you’re actually spending your money.
Take a long look at how you’re spending your money. Even if you’re living within your budget, there still might be areas that you’re spending unnecessary amounts of money.
Are you spending a lot of money on restaurants? Or are you getting more delivery? Do you spend a lot on clothing or shoes? The point here isn’t to criticize your spending (yet) but rather to lay it all out so you really understand where your money is going. This can be a very surprising exercise.
Assign Value to Your Spending
Value is a subjective term, but now that you have a detailed list of how you’re spending your money, ask yourself if it’s worth the money? Dinner out with a friend is more valuable than fast food delivery by yourself on a Tuesday. If the money spent is improving the quality of your life and making you truly happy, then it’s poorly spent money.
A simple system like assigning a number 1-3 (Three being worth it) to your spending can help you determine if the money spent was valuable. This step will set you up to make cuts more efficiently and effectively.
Determine Where Your Money Is Being Wasted
Now that your purchases have a rating next to them, it’s easy to go through everything and see where you’re leaking money. Are there a whole lot of purchases with a one rating next to them? Did you allocate $150 for transportation only to discover your Uber bill is larger is than you anticipated? Have you found areas where you’re dumbfounded by the amount you’re spending money on (i.e. random domain names)?
Hopefully at this point, you have enough purchases with a “one rating” that cutting your spending is easy. If you’re still over your budget, then it’s time for tough decisions. Go back through your list of spending and reassess purchases with a two rating. Which one of those can stay and which ones have to go?
How to Stop the Bleeding
Now that you know where you’re leaking money, it’s time to come up with a plan to overcome this. There are a few options to help you. The easiest solution is to stop using your credit card. Leave that for emergencies. Only use cash or your debit card on a daily basis. Now you can’t go over your spending even if you wanted to.
But those credit card points can be so appealing! If you must use your credit card, start going to the source of your spending. Since you know where your problem areas are and cut off access. Get rid of the Eat24 app if it’s causing too many problems. Unsubscribe to monthly services you’re not even using!
If you’re able to successfully get a hold of your spending, even just a little, it will help tremendously down the road. If you were to save an extra $50 a month and invest it for 30 years, you could end up with an extra $70,000 for your retirement!
Personal finance is not easy. The average American has over $15,000 in credit card debt. It’s important to take a close look at where your money is going. The above exercises might be tedious, but if you’re looking to improve your financial health, it will help you greatly assess your finances and where you’re unnecessarily wasting money.