The average person makes anywhere from 100 to 200+ transactions per month. It’s unlikely that the average person can recall each and every transaction they’ve made over the last month (heck, sometimes I can’t even remember what I DID yesterday let alone what I spent money on).
Having a short memory makes us terrible at understanding our spending habits. Some people are natural budgeters, they can recall perfectly what they spend their money on. But for the majority of us, we need to track our spending to understand where our money is going.
Tracking your spending doesn’t have to be difficult. With the help of technology it can be super easy. Even going old school with pen & paper isn’t that difficult.
Tracking your spending is the only real way to understand your spending habits and make changes.
Habits. They’re both good and bad.
Habits are tough because for the most part they occur subconsciously. You’re not really in control. You may not even realize it’s a habit. You think you’re making the decision but really it’s just habit driving your actions.
When you have a habit, good or bad, you’ve been wired through repetition and rewards to make the same actions over and over. Truthfully you have very little control.
Habits form when a behaviour is repeated often enough to become automatic. There are typically three phases to creating a habit, the cue, the routine, and the reward.
For example, a regular exercise routine is an extremely beneficial habit. Regular exercise can greatly improve your overall health and wellbeing. Getting 75 minutes of exercise each week can extend your lifespan by as much as 4.5 years! (Not to mention you feel so much better!)
Unfortunately, habits can work against you too. Bad habits can form just as easily as good habits.
Bad habits usually form during stressful times, during big life changes, and when you’re bored.
Bad spending habits are super easy to form because there is an immediate reward for spending money. Bad spending habits are also easily formed because there are spending cues all over the place in the form of advertisements.
Bad spending habits can be really detrimental to your financial health. Even a few bad spending habits can cost you $50-$100 per week. Over the course of your lifetime those habits can cost you hundreds of thousands of dollars.
If you think you may have some bad spending habits I’ve got a challenge for you!
Try doing a “no spend challenge” this month. For the next 30 days you shouldn’t spend any money at all. NOTHING!
Doing a no spend month is a great way to reset your spending habits.
I’m not sure what it is, but I love reading about other peoples’ personal finances.
Maybe it’s because talking about our personal finances is somewhat taboo.
Or maybe it’s because I’m a personal finance geek and I love to see how other people organize their financial life.
Whatever the reason, I love learning about another person’s finances.
Because I know there are other personal finance “voyeurs” our there I thought it would be fun to share a bit myself. In this blog post I’m going to give you a glimpse at my own personal finances and share my family’s budget for 2018.
Three times a year my wife and I sit down and review our financial plan. We go over our investments, our asset allocation, our income and our expenses. We make small changes and tweaks to ensure we stay on track with our overall financial plan. Having a solid budget is an important tool for achieving your financial goals.
So, without further delay, here is my family budget for 2018.
When creating a budget, it can be very tempting to get into the nitty gritty right off the bat. Don’t fall into this trap!
The majority of our spending is driven by just a couple of things, accidentally focusing on the small stuff can be a real time waster. Even worse, spending too much time on the small stuff can be very frustrating, it could cause you to abandon your budget all together.
When you look at average household spending are certain patterns that emerge. Some budget categories are very small and some are very large. This obviously varies from person to person but in on average the trend is very clear. There are just three budget categories that make up almost 70% of annual spending.
Those three categories are housing, transportation and food.
When you’re trying to balance your budget, it helps to focus on these three categories first.
Improvements in these three categories will give you the biggest savings for your effort.
These three categories represent the “big stuff”. They make up the majority of your spending. Even a small improvement here can make a big difference to your overall budget.
As a bonus, improvements made in these three categories are easier to maintain. After making a change its typically easier to sustain spending reductions when it’s in housing, transportation and food.
Let’s admit it, budgeting is a skill. Some of us were born budgeters. The rest of us need to work at it. For some of us it’s something we need to work hard at.
Natural budgeters can control their spending without needing a budget at all. For the rest of us, we need to have a budget to keep our spending in check.
Having a budget keeps your spending under control. Controlling your spending will let you save a bit of money each month and saving money on a regular basis is the cornerstone of a healthy financial life.
Budgeting can seem difficult (or even impossible) if you don’t follow the right steps.
If you make a budget the wrong way, you’ll find yourself always overspending each month. By making a budget the right way, you’ll have a better chance of hitting your budget each month.
How to make a budget the right way involves a bit of prep work. That prep work is essential if you want to build a good budget.
When you’re on a tight budget the fear of the unknown is very real. Any little bump can cause major issues. Things like an emergency fund are key to help avoid those issues. An emergency fund helps bridge the gap when cash flow is tight. More importantly however is that an emergency fund helps you worry less about the unknown.
Emergency funds aren’t the only thing that can help you worry less.
There are many things you can do to increase your financial flexibility and worry less about those unknown problems that come up from time to time.
One thing you can do is have a high savings rate. Having a high (+20%) savings rate will give you room breathe.
Another thing you can do is have more than one income stream. Having income from your job, plus investments, plus rentals/AirBnB, plus side gigs will help increase your financial flexibility.
Lastly, and this is what I want to share with you now, having an emergency budget will help you prepare for the bad times and worry less during the good times.