Track your expenses or you will overspend. The simple answer is you have finite income! It is real easy to spend more money than you earn or have. Whenever I have cash in my pocket, I will spend it! It is one of the reasons I do not carry cash. Contrary to most personal finance gurus, I am much more careful when I use my credit card. How do you control your spending?
Many personal finance experts suggest budgets to track your expenses. I know this works, but maintaining a budget is more than tracking your expenses. A budget is a structure to help you reach your financial goals. It is a finance plan that allocates future personal income toward expenses, savings and debt repayment. An effective budget not only controls your spending, but helps you look at your expenses critically to change your spending.
I review my expenses every month and make small changes. Most people create an annual budget and just track their expenses every month. It is a good idea as far as it goes, but I think you should analyze your expenses monthly. I check every expense that has more than 5% variance. Some expenses are the same every month and only change annually. Your mortgage is the same unless you refinance it. Other expenses such as property taxes, property, auto, and life insurance change annually.
My approach to personal finance is to keep it simple! The less you have to think about the better. In business, there are fixed and variable expenses. Fixed expenses or costs do not fluctuate with changes in production level or sales volume. Variable expenses or costs respond directly and proportionately to changes in activity level or volume. Your personal expenses have a fixed and variable component, but are more necessary and discretionary.
Typical necessary expenses are rent/mortgage, property taxes, utilities, insurance, groceries, student loans, laundry, taxes and childcare. Some people may refer to these expenses as your fundamental needs. Discretionary expenses include credit card bills, auto loan, gasoline, mobile phone, entertainment, dining out, travel/vacation, pets, gym membership, alcohol/cigarettes, cable, internet access and clothing (above what’s needed). Saving and investing is separate although I considerate it necessary!
How to keep it simple!
I view my expenses as necessary and discretionary. I take a proactive approach with all my expenses, but the necessary ones require more scrutiny! I spend a lot of time to get the lowest interest rate for my mortgage and best terms. I check the market place for insurance annually to find the lowest price and quality service. In addition, I lower my costs by downsizing my residence, increasing deductibles and reviewing coverage. Performing the in depth analysis of all necessary expenses is called value analysis.
I consider my discretionary expenses as my wants. Discretionary expenses are not essential for the operation of a home or business. I do not need cable, dining out, magazine subscriptions, hobbies, sports, etc, but I want them. I have a lot of latitude which expenses I want in any month. If I spend my money on cable for example, I will have less for something else. I must make a decision what is important to me and what is not. If I spend too much, the credit card interest would make it even harder.
I start with my savings goal! I max out my 403b, IRA and Roth IRA. I set up a payroll deduction to cover my savings. Next, I set up automatic payments for as many necessary expenses as I can. I will only spend what I have left for my discretionary expenses. If I keep them low, I will have more choices such as adding to savings, paying additional principle on my mortgage, or travel/vacation. I do all of it and enjoy overseas vacations too.
To keep my approach simple, I focus on the discretionary expenses and make sure they do not vary each month. For example, my wife and I go to the movies once a month. I bought group discount tickets which reduce the cost of movies by approximately half. I do not get to go to the movies the first weekend, but it does not really matter compared to savings. We go out to dinner twice a week, but we go to modest or inexpensive restaurants. I gave up the gym membership and set up a home gym (less than $500).
Controlling your expense starts with a little discipline and monitoring what you need to. If you focus on the items which can get out of hand, you can control your entire budget. I view it as a spending plan, but you can call it what you want. Controlling your spending may require more effort for some, but it is just making better choices. Take control of your spending one step at a time and you can have a lot more choices for your money. Track your expenses today!
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