If personal finance has a golden rule, it’s this: spend less than you make. If you can only follow one piece of financial advice, that’s the one. Yet, for however simple that advice seems, most people don’t actually follow it. If you’re not, you’re borrowing money and paying compound interest on the amount you borrowed. For some purchases that may make sense, like a mortgage on a house. Entering into debt should be done – if done at all – intentionally and in an informed manner. But that’s not what’s going on when we spend beyond our income, and with easy access to credit it takes no effort to do so.
How then do you begin to follow this golden rule? Track what you spend. You need to know – and understand – where your money is going and how you are using it.
This can be frightening and intimidating. We are taught to attach value to finances akin to “having money is good, and not having money is bad.” With this mentality, people in financial difficulty often judge themselves and enter a self-defeating loop. If you give into your inner negative, judging voice, you won't be able to see your financial situation with honesty and clarity to be able to make the changes you want. The challenge you face is to detach yourself from this judgment. Cultivate an objective mind when you look at your money. This is the essential in developing a healthy financial perspective.
To track your spending, you really need to record every monetary transaction you make. This includes money coming in (paycheques, loans you take out) and going out (purchases, rent, debt repayment, etc). I personally prefer to do this manually by keeping a pen-and-paper record of all transactions in a blank book or journal. If you're more technologically inclined, or if technology will get you to stick with your tracking exercise, use a spreadsheet. By manually entering every transaction, you are connecting with, and understanding, your money and the habits you've developed surrounding its use. You can tally it either as you spend or receive money, or you can keep your receipts and enter them at the end of each day, but you have to do this consistently. By each day's end, you should know exactly how much money you have and where every cent that has gone.
If manual entry seems daunting, consider a bookkeeping app like Mint.com. This website and phone app allows you to link your bank accounts, credit cards and loans, and will let you track all of your income and spending automatically. You still have to do some work as it doesn’t always categorize transactions correctly, so you still have to go in and categorize your expenses, but you no longer need to manually enter each purchase you make. Some people find this a much easier and better system. Just keep in mind you are losing out on the advantages of writing this information down, including the immediate and very real connection to your spending habits.
After a month of this practice, you will develop a sense of what you have been doing with your money during the course of a month. Separate purchases into common categories like groceries, housing, entertainment, eating out, debt payments, etc. Figure out how much you’ve spent in each category and total the amounts. (Pro tip: Keep separate categories for groceries and eating/drinking out.)
At the end of the month, ask: Did you spend more or less than you made that month? What spending habits do you see when you look at these categories and receipts? Does this reflect your values / Is this how you want to spend your money? In compiling this information, you’ve created a budget template, which means you have a rough idea about what you spend in a month and can project your future spending needs. More than that, once you know how you’re using your money, you’re in a position to make conscious changes about your spending habits.
Other tools that may help you track your money include cash envelopes (more on that in this blog post), keeping a consumer spending journal, or other forms of creative journal tracking. The trick is to find the approach that works for you. Keep that in mind as you begin. Try as many different ways of tracking your money as you can and see what actually works for you. There’s a solution out there for you. You just have to be willing to try a few options.
Budgets and spending plans succeed when they are flexible. You know this already, but life can be unpredictable. You’ll find items in your expenditures that you weren’t expecting. Don’t let this throw you off course. Those exceptions happen, and as you do this month after month, you’ll come to find that they happen nearly every month in one way or another. Maybe it’s a birthday party you were invited to attend, or perhaps your car needed a repair. As you become more proficient at budgeting, add a category for those surprise expenses. Every month can be “exceptional,” but that doesn’t mean you can’t be prepared for it.
A few final points... Be sure to budget a line for savings, including building an emergency fund. Building an emergency fund will keep an unexpected expense from turning into a disaster. And don’t forget to give yourself a set allowance for fun spending money that is not to be exceeded. Any budget plan with nothing set aside for fun is a plan for failure.
Make a plan, stick to it, and keep moving forward. You can do this!
(If you’re interested in seeing the startling amount of debt Canadians are starting to accumulate, the Government of Canada has a comprehensive and interesting article available here. Want to know what the Americans rack up? The Federal Reserve publishes quarterly statistics about it. If you would like a meaningful discussion of debt, NerdWallet offers an accessible analysis on household debt and what it means.)
If you have any questions, feel free to email Justus Joseph at Squirrel and Nest.
Squirrel and Nest offers one-on-one and small group financial counseling services that aim to give individuals the knowledge and independence they need to get their financial lives in great shape.