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"What are you doing?" my wife asked as she came into the
dining room one Sunday morning. Scattered across the
table in front of me were a years worth of canceled checks,
several credit card statements, and a 9 page printout from
Quicken.
"Do you realize that we bring home about $5000.00 a month
and we have almost no money in savings?" I replied.
"Really!? But where does it all go?"
"That" I replied "Is exactly what I'm trying to figure out."
"But doesn't Quicken tell you that?" She wanted to know.
"Well it should" I said picking up the 9 page printout
"But 9 pages of numbers in 40 categories tells me that
we are spending all our money. What I've got here is too
much information. Somehow I've got to cut through it
and make sense of it."
"Here, let's try something." I said as I cleared a section of table.
"We know how much money we make. So let's multiply our
weekly paycheck by four and call that our monthly income."
I wrote that number on a post-it note and stuck it near the center of
the table. Next I found the canceled checks from last month's
mortgage and car payments. I placed them directly in line under
that.
"I see what you are doing." My wife said "Since we have to
make the car and house payment every month, we don't have
that money to spend on other stuff. So we will subtract those from our income."
"Let's see what else there is." I said flipping through the stack of
checks. "Here's the insurance on the car, phone bill, electric,
gas, water, and cable TV bills" I said adding them to the growing line
of checks. I also added the checks from our weekly grocery shopping
trip. On a post-it note I also put down the monthly charge our ISP
makes to our credit card.
"Better add the minimum monthly payments for the credit
cards." My wife added.
What we had done was to separate out all the expenses that we make
each and every month. These are our fixed, or necessary expenses. I call these
lifestyle expenses because the basic choices you make about your
lifestyle like the cars you drive, the house you live in, the food you eat will
affect these expenses. If you go through this exercise you may have to
add monthly health club dues, cell phone bill, news paper, regular contributions to a
church or synagogue. Anything you pay for each and every month.
"Wow!" we both said as I added up the numbers "Over half of our income
is gone!"
"But where does the rest go?" My wife asked.
"J.C. Penney's, Target, Costco..." I said reading from the credit card and
bank statements.
"Restaurants, ATM..." I continued.
By now I had grabbed a large notepad and was making columns. I labeled
them
As I looked over the checks, credit card, and bank statements, I entered
the amounts into these broad categories. For a reality check I also went
back and did the same for the previous two months.
Then I added it all up. The results were sobering.
"Oh No! Are we just total spendthrifts?" My wife wife wanted to know.
"Sure looks that way." I said shaking my head.
What we had done is to get our discretionary expenses sorted into broad
categories. You can start with mine, but add your own categories according to
your spending habits. But don't add too many. The idea here is to gather
your expenses into related groups to reduce the amount of data.
What we have here is the things we spend our money on after we have paid
our fixed expenses. Unlike our fixed expenses, we could, by force of great personal
discipline, stop paying these expenses.
"So let's see what we can do about it." I said.
"Not much we can do here. We have to pay these" My wife said as she looked
over our fixed expenses.
"Not so fast." I said "Maybe there are things we can do. For instance:
Some of these measures are a bit drastic. But lowering your fixed expenses
takes effort. You have to restructure debt, switch to lower cost services, etc.
"Now, about this." I said looking at the discretionary expenses
"First thing we need to do is cut out the weekly shopping trip. We
spent over $200.00 last weekend and I can't even remember what we bought."
"Next we can stop eating out so much. Including my lunches, we ate out more
the 30 times last month."
"And cut out the visits to the ATM" My wife added.
I agreed. "Most of this is for my lunches, gas for the cars, and other incidental
expenses. What we should do is figure out a reasonable amount to have and
give ourselves a weekly allowance. Then spend that carefully because there
will be no trips to the ATM for extra cash."
These changes are actually the hardest because you have to change your habits.
Ask anyone who has tried to kick a bad habit and you will know what you are up
against. But, by identifying your bad spending habits you have taken the first
step. Then you need to craft a plan. Start with the most glaring problem.
"So what are we going to do with all this money we saved?" my wife asked.
"Ha! We haven't saved it yet." I said. "I figure that if we are good about our
spending we can save about $200 to $400 a month. Half of that is going to
pay down the credit cards, and the other half is going straight into savings."
You don't save anything if you just turn around a splurge it away. You have to
have a plan for what you do with your unspent money. Making extra payments
to pay down your debts is a great use for this money. By paying down your
debts you free up even more cash. Now think of stashing that cash away for
a rainy day or investing it.