Since the very beginning of Money360, I’ve talked about what I consider be the fundamental rule of personal finance: spend less than you earn and do something financially sensible with the difference. If you can do that over every pay period, every month, and every year of your life, no financial hurdle will be too difficult to cross.
How do you do that, though? It’s easy to say, but much harder to implement, especially when you’re turning your attention to personal finance for the first time.
One of my favorite eye opening and useful strategies for migrating to a natural pattern of spending less than you earn is to keep track of every dollar you spend and review the spending regularly.
Why do this? There are three big reasons for it.
First of all, many people lose track of how much they spend on little expenses throughout their days. They wonder where “all of the money went,” and the truth is that it usually goes away to a flood of little forgotten expenses or inflated grocery or department store trips. Most of those things are just completely forgotten within a week or so (or sometimes even faster), leaving people wondering where the cash went.
Second, most people have no idea how much money they spend on a particular type of item, and seeing that is usually a shock to the system. A person who gets a morning coffee at a drive-thru each morning might just think of it as a “few” $5 stops, but when they step back and look at it over the course of a month, they’ve spent hundreds of dollars on that morning coffee. I’ve done that very thing myself with other expenses, such as Kindle books. I thought I was keeping track of them and I thought I was spending less per month than I was, so reviewing the actual total was a pretty big shock.
Third, those realizations often lead to some real financial changes. When people go through the process of really reviewing their spending and then deal with the surprises that the review reveals to them, they’re usually ready to make some common-sense financial changes in their life, ones that simply cut away a healthy amount of excess spending and change a few simple routines without making life “miserable” in the least.
So, how do you embark on this little journey?
The first thing you need to do is to get out all of your bank statements, credit card statements, and receipts for the last couple of months, everything you can find. The bank and credit card statements are the most important ones, but grocery and department store receipts are pretty useful, too.
I find it’s also a good idea to have a bunch of different colored pens or highlighters, as this helps a lot with the review process.
Now, start going through those statements and receipts, and for each and every item, ask yourself these questions:
Was this a good decision? Looking back, was this really a good use of your money? It’s really okay to say “no” here. In fact, the absolute best policy is complete honesty with yourself. If a purchase wasn’t good but you’re ashamed of the choice, don’t falsely say that it was a good choice just to “save face.” Be honest with yourself.
Did I get real lasting value from spending that money? In other words, whatever you spent that money on, did you get any real lasting value from it? Is it something that’s still resonating as a positive thing in your life right now? Or was it a momentary thing that faded almost immediately after buying it? Things that fade away quickly and have no impact on your life just a few weeks later are things that probably aren’t worth your money. It is worth noting here that there are items that are worthwhile purchases if you go for the most basic version, but when you buy a premium version, you’re not getting any extra lasting value out of the extra expense.
Could I get the same value by spending less or spending nothing? In other words, could I buy a lesser version of this and still be happy? Could I skip this purchase entirely and still be happy? Could I borrow this item instead of buying it and still be happy?
Is there a way I could reduce or eliminate this expense without reducing any real quality of living? The questions from the previous step will often lead you to some action you could take that will reduce your spending on that particular item going forward without an equivalent loss in life quality. Make a list of all of those changes. Write down every single one. This is going to become a to-do list of specific financial changes you can make that are geared to your life.
Your “to do” list from this project is invaluable. Make it a key part of your routine going forward to take care of as many things on that “to do list” as possible. Some of them will be specific actions, like one time things you can do to cut your energy bill. Others will be behavior changes, like making your own coffee each morning instead of hitting the coffee shop. Make that to do list a big priority in your life.
As you’re going through this, I highly recommend highlighting each different type of expense, particularly the repeated ones. If you find yourself seeing the same type of expense popping up again and again – things like coffee shop visits, Amazon purchases, and so on – highlight them with a specific color and then make a monthly total of all of those purchases. That monthly total is often shocking, particularly when it covers a type of small repeated purchase that you often forget about. That total itself can often trigger a new addition to your to-do list.
As I said, at the end of all of this, you should have generated a nice little list of things to do and changes to make based on what you discovered. Spend some time taking action on this list. Try to adopt some of the habit changes you identified, and make sure to take care of some of the distinct actions you identified. Maybe you need to change your routine of eating out for lunch every day. Maybe you need to switch your light bulbs at home to more energy efficient models. Maybe you need to call your cell phone company and negotiate a little. Maybe you need to start buying store brands at the grocery store.
That list is a personalized frugality checklist, made just for you, that’s a perfect reflection of how you spend money, which means that it should be incredibly effective.
Here’s the thing: you probably won’t be able to pull off everything on that list. There will be some things that are just miserable to do, like changing a pattern you really care about. There will be some things that you just put off until you never do them.
And that’s okay.
What matters is that you do some of them, that you pick the low hanging fruit on your frugality tree. Take care of the things that are easy and you’re going to get a huge return for the small amount of time, energy, and discomfort you put into it.
If you do that, take the money you’re saving and do something smart with it. Don’t give yourself the chance to spend it foolishly elsewhere. Start making a retirement contribution with it, or use it to start paying down debt, or use it to build an emergency fund.
This is such an easy first step on the path to improving your financial state. Just get out your bank and credit card statements and receipts and start going through the items on there, one by one. Figure out how to fix anything that looks like a pattern or a problem, and make a list of those fixes. Do as many of them as you can – don’t sweat the ones that are overly difficult or miserable, and stick with the changes that don’t have a big negative impact on your life. That’s it – that’s the start of the path to real, lasting financial change.
It all starts with a big list of your spending, and ends with doing something meaningful about it.