Thursday, July 19, 2012

Rule #5 Know your Monthly Expenses!

Know your monthly expenses!

We don't really have monthly budgets - we pretty much pay everything off every month - thats about our only rule regarding budgeting we have.  If we can't pay off something in one month, we've spent too much and its time to cut back our spending.  We do however know where our money goes because we've tracked our spending 3 times in the last 8 years, and thats my rule... know where your expenses are and what you spend on them... but how can you really know what you spend your money on?

At least once in your life, the earlier the better, keep detailed records of household expenses for a three month period.  Three months are better than one because it lets you smooth/average out expenditures such as groceries if you do the odd Costco run for example.  Diligently tracking your expenses is one of those exercises that is a royal pain-in-the-ass when you are doing it, but it can really be an eye-opener and a very useful tool to determine where your money is going.  Whats that? You already know where you are spending your money? I did too until we did it for the first time about 8 years ago.  We thought we were spending about $500 a month for the two of us for groceries.  The thing was, we were both buying groceries so we weren't always aware of what the other was spending.  In the end we were actually spending about $700 a month on groceries.  It wasn't a bad thing to spend that much each month for groceries - the point was we were spending 40% more than we thought we were spending.  We talked it over and said to ourselves "Is that a reasonable amount for a couple to spend each month on groceries?" In the end we changed a few things and settled on a number that we were prepared to pay and adjusted our spending habits.

We noted a few expenditures and then challenged ourselves whether we thought the money was well spent... I discovered I was spending about $80 a month for coffee at work.  I didn't realize I was spending so much on coffer for me and for other people.  People who know me, know that I am a very frugal man so spending $80 for coffee at work sounds like an excess, and on paper it was.   The thing is the industry I worked in had a coffee culture - one where relationships were usually built over a cup of coffee - and in that business, relationships were often just as important as technical ability.  I saw this as an investment in my career and work satisfaction so the $80 coffee budget stayed in.

The great thing about tracking expenses is that if and when you do decide to save and invest more, you know whether you even have left-over money to save, or whether you are going to need to make some adjustments.  Some of monthly expenses will be fixed such as rent or mortgage payment, but others will be variable such as spending on entertainment, booze, gasoline, heating costs etc...

Tracking your spending also has an interesting side effect.  Knowing that you will be documenting your purchases, I am pretty sure it will make you think more about what you are buying.  It actually makes you more conscious about what you are buying while you go through the exercise.  Give it a try.

Here are some of the buckets we group our spending into

Fixed Housing (Rent)
Variable Housing (Utilities, Heat, landline, internet)
Car (gas, insurance etc...)
Clothing for Work
Clothing for our Kids

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