03: How do you spend your money?

We are going to be talking about budgets. That’s right get pumped people for all things budgeting.

Why does everyone hate budgeting so much? You know what I think? It’s because your thinking about it all the wrong way. It shouldn’t be called a budget. It should be called a spendit. Think about it. A budget is all about planning how you get to spend your money. How good is that? I love it.

If you’re serious about managing your money you better get comfortable with making a budget.

And truly it’s not as hard as you think.

But before I break it down for you let’s talk a little bit about why you should have a budget.

It all comes down to that beautiful place in consciousness called awareness. If you have been following the podcast so far you might be recognising a theme here. In How to get started we covered being aware of where you are financially by knowing your net worth. In Planning your dreams we discussed goals and why it’s so important to be aware of what you want to achieve and work towards that. Now in this episode we will cover how we are spending our money so we can make changes and tweak our spending if necessary.

The money you make is your money and you can do whatever you want with it. No one can tell you what to spend your money on but I have a sneaking suspicion you may not be fully aware of what you are actually spending your money on. I will give you an example of this.

Hundreds of years ago in my twenty’s, well not quite a hundred years ago but post two kids it feels like a distant past. In my hay day living in hip Balaclava on my way to work each day I used to buy a latte from the café under the train station and enjoy it on my way to work. Then at morning tea time my work colleague would do a coffee run and I would buy a second cup of coffee. I can’t remember exactly but I think at the time I might have been reading a book or an article about money that got me to add up how much I spent per week on coffee. Back then coffees were about $2.50 each so I was spending $5 a day on coffees 5 days a week. Oh and then there was the weekend coffees that I’m not even including in this equation. So if we base the calculation on $25 per week over 48 weeks of work that equals $1200. Well back then I remember that calculation blew my mind. I just couldn’t even comprehend I was spending that much money on just coffees. I really had no idea.

Now I am in no way suggesting that you have to cut out buying a coffee if that’s something you enjoy and consciously want to spend your money on. The point I’m trying to make is having awareness of what you spend your money on is so powerful in creating more and spending less. Back then I was living pay cheque to pay cheque simply because I didn’t understand the value of learning how to spend my money consciously.

And think about if you are buying 2 coffees a day 5 days a week, 48 weeks of the years. I’m accounting for the assumption you have 4 weeks holiday. And what do coffees cost now, about $5 yeah? That is $2400 a year you are spending on take away coffees.

We have a middle of the range coffee maker at home and an awesome Italian grinder that was definitely on the pricey side and we buy good quality fresh beans that we grind ourselves. Even if we bought a new coffee machine and grinder plus beans every year we would still be ahead by about $1000 each year compared with if we bought 2 coffees a day. I mean isn’t it amazing how much money you can save when you just get some awareness around what you are spending your money on? But again let me be clear if spending a couple of grand on coffees every year is something you are consciously choosing to do and you like your reasons, go for it. Like I said before it’s your money and you can spend it however you want right? I just know for me that wasn’t the case. I didn’t realised how much I was spending and when I became aware of that I knew that I did not want to allocate that much of my money to takeaway coffees.

So with that in mind let’s go over the basics of creating a budget.

Like I discussed in How to get started you can do a personal budget or you may want to do a combined budget if you have a significant other.

There are many different ways you can write a budget up- on a note pad, using an excel spreadsheet so you can do calculation easily.

Or you can even google budget spreadsheets and there are lots of free ones on the Internet that may be suitable for you. I have created a budget in all the ways I just mentioned. I’m currently using a combination of spreadsheets I found on line and then tweaked to suit our family.

I don’t believe there is one template that fits everyone because all our wants and needs are different but let’s go over the basics and then you can change things as you get more experience with budgeting regularly. And when I say regularly I do a budget every year or I update it when our circumstances chance.

The main factors are you need to start by recording your income and then list your expenses. As I learnt from one of my teachers Noel Whittaker in his book Making Money Made Simple. There are two main types of expenses: essential expenses and discretionary expenses. Essential expenses can be broken down further into fixed and variable.

What???

Ok did I just lose you?

Let me explain. Basically there are regular essential expenses you have for operating in life that don’t change for example rent or mortgage you pay every month, car registration you pay every year, school fees you pay each term etc. These are your essential expenses that are a fixed cost. So you know every month you will be paying the same amount of rent. Hence, why they are called fixed essential expenses. Then you have regular expenses that are essential but the price varies month to month for example your electricity bill, that’s going to change from winter to summer or your groceries and petrol. So these are call essential variable expenses.

Then we have items that we choose to spend money on but they may not necessarily be essential to our day to day living like that new pair of shoes you so desperately ‘need’ in inverted commas I mean want. And when I say you I’m actually really talking about myself here. These are called discretionary expenses. Other examples of this might be Netflix subscriptions, gym memberships, swimming lessons for the kids etc. Of course these are things we want to spend our money on. I love our family ritual of taking the girls to swimming lessons once a week but if we need to make some cut backs in our spending for whatever reason I’m very clear about how we spend and where I can make cuts. We have certainly done that in the past. When we have been saving for something specific we have simply cancelled our entertainment subscription services. It’s like I said before it’s an awareness. Conscious spending of your money.

I like categorising my expenses in this way as it makes it really easy for me to see where I can cut back or redirect my spending if necessary and where the majority of my money is flowing to. It’s also super awesome for streamlining my bank accounts so I always have enough for my expenses but how I organise my bank accounts is a topic for another episode.

 

INCOME Any income you make here
·      Salary $
·      Rental income $
·      Interest $
TOTAL $
EXPENSES
Essential expenses The regular essential expenses you have with fixed costs
Fixed
·      Savings $
·      Rent/Mortgage $
·      School fees $
·      Car registration $
TOTAL $
Variable The regular essential expenses you have that vary in cost
·      Holiday savings $
·      Groceries $
·      Phone bill $
·      Petrol $
TOTAL $
Discretionary Expenses Expenses we want but don’t necessarily need
·      Netflix $
·      Gym membership $
·      Magazine subscription $
·      Takeaway dinners $
TOTAL $

 

This is a very basic table you can adapt for your own budget.

Ok so once you have recorded all your income and expenses in some form of table or document. How do you work out how much you spend?

I try to be as accurate as possible within reason. I use different methods to calculate my expenses. Your fixed yearly expenses are the easiest. You just record how much your bill was last year. More often than not your bills go up year to year but lets not complicate things here.

For the variable expenses I go back over my bills or bank accounts for 3 to 6 months and record how much I spent and then average it out. For example for our grocery shopping I would work out how much we spent in 3 months and then divide that by 12 to get an average of what we spend each week.

A little tip to make this easier for you- if you use a debit card to make purchases when you go into online banking and select that account you can search for transaction from the one vendor. I can’t speak for all banks but I know some banks have a search facility. For example you could type in Coles and all your transaction for Coles will come up in the search. It just saves you time scrolling through trying to find your expenses. There are also lots of apps available to track your spending. You can link then to your banks accounts or enter your spending manually. Using an app like these is a good tool if you want to track your spending over a couple of months to get a really accurate picture.  I have tried the pocketbook app.

Just to make things clear. I have only every done an in depth budget like this once. Because you only need to do it once if you have never made one before. Once you have done it you have it and only need to tweak it year to year. And the first time you do it. It’s really about seeing how you currently spend your money. If you find you are spending more than you earn, having this budget clearing shows you where your money is going so you can decide what you want to change. Because if you don’t know this already it’s really important to know that to manage your money effectively the first rule is you must spend less than you earn.

Now for the truth bomb- from memory I think it took me a good half to full day to do my very first thorough budget like this. And I’m not going to say that I particularly loved doing it but guess what this is what 'adulting' looks like. I don’t particularly enjoy changing my daughter’s nappy but I do it because it needs to be done and I enjoy the result of having a clean child. I also enjoy the result of having awareness around what I spend my money on and how I want to spend it.

Once you have completed this activity and see how much you spend you will be in a very powerful position to make changes if you choose to do so.

Apparently, from the impression I get from some finance books and peoples’ opinions is that a budget is this really difficult restricting document that you have to abide by and record every cent and it’s impossible to stick to and if you regard it in this way I totally agree. But this is not how I view a budget.

I see it as a tool to be aware of my expenses so I can allocate my money into different accounts so when the time comes- that is, the due date for a bill I have the money ready to go. It also allows me to make informed decisions about how much I want to put away for savings and investing and how much I have to splurge on whatever I want.

So go ahead and give it a go. You might be surprised how empowering it can be when you know what you are spending your money on because now you have the knowledge to make informed decisions about how you deliberately want to spend your money.

Until next time have fun budgeting!

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