In a previous article, “How to become financially stress-free”, I made it a point to suggest there is a lack of basic knowledge on how to handle money. You might say “handling money is not a problem – I earn it and I spend it”. And you would be right until, maybe
– suddenly you are spending more than you have, or
– you are trying to save up for something major.
Generally, if you think about it for a few minutes, it is pretty easy to quickly know:
a) how much money you have coming in (or how much you have in accessible savings), and
b) how much your major expenses amount to, such as rent, car payments, heat and hydro, and maybe a pretty good guess for groceries.
But usually when you add up what you spend and deduct it from what you earn, in most cases you realize that you should have more left in your pocket at the end of each month than you do – or even worse, you are short and start to wonder why.
One of the most important things about handling money can be summarized very simply – you have to know where the money goes. There is only one tried and true way for you to know for sure where the money went – you have to keep track of all your expenses!.
It may appear like overkill, but in order to get control of your finances, you have to know exactly how much you are spending every day, and what your are spending it on!
Daily Expense Recording
And that means, very simply that you have to keep track of each and every expense or purchase, no matter how small. Yes, it will be a pain in the *ut* for everyone in the family to do this, but it is the ONLY way you will really know where the money goes.
Years ago, when I realized I didn’t have enough to cover what I needed to pay, I had to do this myself. You need to know that this was a long time before smart phones, tablets, and personal computers! So I had to have a little notepad and a pencil with me at all times. Diligently, I then marked down how much I spent and what it was for, hopefully, as soon as I did it. The checkpoint for me was to compare how much money I had in my pocket in the morning versus what was left at the end of the day. Then I checked to see if the total of the expenses I had recorded was reasonably close to that difference. If the totals didn’t match, then it usually meant I had forgotten to write down some item; since I did this on a daily basis, it was usually pretty easy to recall what it was.
(In my case, this was way before the extensive use of credit and debit cards, where you actually get a receipt for your transaction – now you know I’m a really old f**t!)
Get an app to help
Nowadays, you can find lots of free apps that will make expense tracking a lot easier for you, particularly for cash payments – for everything else, you should have either a credit/debit card slip; even if you buy something on line, you can print yourself a receipt. (I suggest you do a quick online search for free apps; I’m sure you’ll find one that is easy to use.)
There are many ways to keep track of your expenses; however, rather than bore you with my approach, I suggest you search and get advice from others who are far more qualified than me. A couple of good articles are:
Summarize your results
Perhaps after a week of marking down each and every expense, you should sit down and either assign or select categories of expenses. At first, you will probably end up with a very large group you will want to call “Miscellaneous” or “Other” – try to avoid falling into that trap – break stuff down!
Otherwise, your coffees, soft drinks, chewing gum (hopefully not cigarettes), newspapers, and so on will end up there with a lot of things that you don’t know where to put or categorize.
If you have placed an app on your phone or tablet, it will usually have a good number of predetermined categories to which you can assign your purchases. For expenses where you get a receipt, it should be easier to categorize.
Don’t forget a couple of important sources/record of expenses:
– automatic and/or recurring charges to your credit cards – may include interest charges
– automatic and/or recurring charges to your chequing account; may include overdraft or other fees, like charges for using your debit card.
While you don’t have to be anal about it, the objective is that, at the end of a month, what you have recorded as spent should relate to what you received as income. Any difference simply means you have increased your savings – hooray! – or you have gotten deeper into debt – boo!
What you will learn
Unless you know how much you are spending, and what for, you will never be able to get control of your finances.
It may take three months, because some things don’t occur every month, but upon reviewing the summary of your expenses, you will probably get a few surprises. These surprises will generally not be for the big ticket items, except perhaps for food – most people don’t realize how much they really spend on food, especially when they add in Friday night pizza, and so on.
As you examine the various categories, you will probably be quite surprised to know how much you are spending on discretionary (maybe not essential) items like coffee at Tim’s, snacks, etc… For those of you who carry credit card balances, a surprising amount will be credit card interest, which is seldom less than around 18% annually; so if you carry a balance of say $2,000., one of your monthly charges will be about $30. for interest alone.
When you evaluate where the money is going, you will start to realize that, to take control, you need to take action and reduce, eliminate, or delay some expenses. You may find that you don’t really need to spent $80. per month on fast food – sound like a lot? If you spend $25. each time you take the kids to MacDonald’s, that’s less than once each week in a month!
You get the idea! Looking at what you are doing will start to provide you with ideas of what habits you should change.
If this article has stirred you you to action, the next one, which is the next step to take control of your money, will be family budgeting. This will help you take your expense categories and set them up as the basis for your budget. However, if you really want to get at it, like in the last article, I suggest:
• Go to your local public library and get a self-help book; your librarian will be happy to make some suggestions.
• Do some research on the internet; there are many excellent and free budgeting resources that can help get you on the right track.
• A quicker solution could be to book an appointment with a credit counselling agency, many of which are non-profit and will counsel you on budgeting at no cost.
Bob is a retired business executive, strategy consultant, and community volunteer; he is also an officer of Grand River REI Inc., the company that designed and offers Home Purchase Solutions.
I am not trained in credit counselling or credit score improvement; my suggestions are based on research and personal experience.