Here's a "back to basics" rule that always comes in handy!
I think one of the most important keys to managing your finances is to be aware of what you are really spending money on. Think about it-- whenever people complain about being broke, don't they always say something along the lines of "I swear, I just don't know where it all goes!"
There are so many things about money that are unknowable and unpredictable. You can strategize and make educated guesses, but no one really knows what the performance of an investment will be, where interest rates will go, how tax laws will change, or whether they'll get a raise. But one thing you CAN know is what your own spending and savings habits are, and for most people, it's probably a pretty good starting place to figure out what they will be in the future, or how best to change them. Once you know what is knowable, then you can worry about the guesswork. First of all:
- Keep Records
- Look at your spending records and total them up by category.
I think a software program such as Quicken is a great investment, but you can also easily create an Excel spreadsheet or two that will serve the same purpose. Before I had Quicken, I used to do a big spreadsheet once a year. I'd sit down with my bank statements and credit card bills and enter all the transactions and sort them into broad categories. For checks and credit card expenses, it was easy to see what I had spent the money on. For cash, it was harder, but I totalled up all my ATM withdrawals and then thought about all the things I tended to buy with cash-- I multiplied out what I tended to spend on breakfast and lunch and subtracted those from the total. I subtracted an amount for laundry. Whatever was left was just categorized as miscellaneous. It wasn't very accurate, but it was a start.
Think about the categories your expenses fall into-- which ones are fixed expenses, such as a mortgage payment. Which ones are variable expenses, such as clothing? Which ones are necessities and which ones are luxuries? There is no one right way to do this-- think about what makes sense for you. Instead of just having a category for Books, for instance, you might want to have a category for Education and another for Entertainment. The cost of a book about how to start your own business might be put under Education, but a Danielle Steele novel would go under Entertainment-- you might want to think about what expenses are investments in your future in some way, vs. just throwaway spending on something with only temporary value.
- Analyze the data
This is where Quicken can make things really fun, because of all the reports and graphs you can easily run. For example, a few years ago, I started hanging out with some new friends I'd made, who happened to enjoy good food more than some of my other friends, who I also didn't see as often. Here's a rough illustration of what I discovered:
The green arrow represents when I met those new friends, changed my social habits and started eating dinner out more often and more expensively. The shape of the red line representing my net worth is a bit exaggerated, but it just blew my mind how noticeable it was that I was saving less money just because I had started hanging out with different people! So you can bet I dropped them like a hot potato!
Ok, I'm kidding-- I did not really sacrifice my friendships on the altar of personal finance, but it did make me think we should maybe start doing some at-home dinner parties more often instead of blowing so much money at restaurants!
For other people, graphing net worth vs. friendships might be irrelevant, but if you can look at how your spending changes throughout the year, how much you spend in different categories, whether you're saving money each month or constantly in the red, you're bound to learn something about yourself. (And though analyzing your spending is a good place to start, don't forget to look at your income and investments too.) In the long run, that awareness will help you make decisions and align your actions with your priorities and goals, whatever they may be.
I suppose the reason I decided to post about this today is that I am so stressed out about what's going on with my condo purchase! I keep thinking about how much it's going to cost and trying to figure out the long-term consequences of my decisions. Sometimes it feels like I've bitten off more than I can chew, but then I remind myself that I know what I spend. I know what I have to spend and what I can cut. I know how much I save. I know where my limits are. I can do this. I'll be okay.