Many of us have a vague concern that we may be living beyond our means. It is tempting to believe that next month will be different. It’ll be the month when there are no unplanned expenses and our income more than covers our expenses. There’s something to be said for remaining ignorant. If we don’t examine the details, we can keep thinking next month will be different without really having to face up to our true situation. After enough sleepless nights, though, we may be willing to make a change.
As Peter Drucker famously wrote, “What gets measured gets managed.” The opposite is at work in our unexamined lives—what we don’t measure, we can’t manage. The key to turning around our spending habits is looking at the details. Though it is hard work, we can measure our income and expenses and use what we learn to get on a better track financially. Which, by the way, leads to less stress and fewer sleepless nights on the way to our achieving our dreams!
Taking a closer look
To change your spending habits, first you must commit to at least 30 days of tracking every penny of income and expense. I was first introduced to the idea of tracking in the 90’s by Joe Dominguez and Vicki Robin’s classic Your Money or Your Life. It literally changed my life. Tracking the details gave me the foundation to live a more deliberate and meaningful life, leaving the corporate world to sail to the Caribbean and discover subsequent careers that closely reflect my values.
For at least 30 days (more is better, but you know best what you can live with), track every penny that moves through your life, whether cash, credit or any type of electronic transfer. You can use an app, there are plenty, or an old-fashioned spreadsheet that you update frequently. If you use a spreadsheet, you’re going to need a method of capturing transactions in real time, with a paper or electronic receipt, for example. Pick the system that you’re most likely to use, recognizing that detail tracking is not a favorite task for most of us.
Real-time money tracking gives us a detailed picture of our cash inflows and outflows. The details are useful come review and decision making time! For example, I want to know whether I was out for drinks with a girlfriend or coffee with a client. Did the trip to Costco include a standing rib roast for a birthday celebration or just the usual groceries? By capturing detail, I can more realistically target areas to reduce.
I admit that I’m a financial geek—I think the numbers tell a story. Stay with me here, because your next step, after collecting a lot of data, is to see the story your money is telling you. Group expenses in to categories that make sense to you, then look at your monthly totals. If expenses exceeded income, you know you have some digging to do. Reflect on how you feel about your income and spending and how it aligns with your values.
Individual expenses: Some purchases that felt good at the time may not hold up well in review. We’ve all convinced ourselves that we couldn’t live without an item only to find it still in an unopened box in a closet weeks or months later.
Categories: Any surprises here? Often our detailed review confirms our nagging suspicions—yes, you have been eating out/ordering in five nights a week.
Like losing weight, overspending has two variables—inflows and outflows. In a perfect world, earning more cures overspending. In the real world, until we learn to spend less than we make, earning more means overspending at a new, higher level. Focus on your outflows. Which expense categories stand out as being out of sync—not providing satisfaction that equals or exceeds the expenditures? What areas of spending need to be reduced because they aren’t in-line with your priorities? If your overall spending is keeping you from achieving your goals, pick the areas that you want to cut. We’ll share tips for implementing your cost-cutting decisions in a future blog post.
Living within our means and loving it takes practice. However, pausing before purchasing gets us on our way. Before you make any purchase, from paying the electric bill to buying a coffee to charging a Caribbean cruise, stop briefly to reflect. Merely pausing will eliminate some of those unconscious purchases—not a bad outcome! Checking in to see how the impending purchase makes you feel and asking yourself how it fits in with your priorities will allow you to make a better decision for you. With the awareness you’ve gained from tracking and critically reviewing your money story, you’ll be more discerning when you pause to consider a new purchase.
Celebrate the progress you’re making as you start to see daylight and climb out of the overspending hole! That progress will build your confidence and motivate you to take another small step. Changing our habits is hard work. Find an accountability partner. It’s a process to turn around our tendency to overspend. The best time to start was when you were five, but the second best time is today!
Need coaching to change your own financial picture and start moving towards your dreams? Give me a call at (336) 701-2612.
Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the State of North Carolina and in other jurisdictions where exempted.