Why understanding your spending patterns is critical to financial success. If you don’t tell your money what to do, it magically disappears each month.
Grab a piece of paper or your favorite budgeting software and start digging in to your banking app or receipts and write down your observations:
- Track your spending for the last 30 days.
- Categorize everything you spent money on.
- Notice where all your money has gone. Is there one category that really stands out?
- What spending patterns do you notice?
I have a friend who always says how ‘lucky’ I am to go on a fabulous vacation every summer. She can’t she explains because she just can’t afford it. Yet I notice that she NEVER misses a weekly pedicure, for the last 25+ years that I have known her.
When she says I’m lucky and she can’t afford – I have to admit, I get a little bit annoyed. There is nothing lucky about planning where your dollars go. There is nothing lucky about saving and prioritizing.
And if we do a little math we can conclude that she could easily afford a vacation. She has a pedicure line item in her spending that is $40/week x 52 weeks in the year = $2080 (not including tip). She could easily have a fabulous vacation every year for $2080. She prioritizes pedicures over vacations, I prioritize vacations over pedicures. I don’t NOT get pedicures, just not as many, maybe 1 per quarter.
There are many things many of us can’t afford or don’t want to prioritize. But looking closely at patterns and habits is an eye opener to show you what you can actually afford and where your priorities lie.
While this deep dive into your monthly expenses will clearly show you what is important to you and how you spend your money – it will also show you what you skimp on and what you could cut back on.
Categorizing where you spent your money for the last 30 days will show you if maybe you are over spending on eating out. Underspending on saving. Overspending on impulse buys. You get the idea.
In my scenario above with my friend, I could reallocate some of my vacation money towards saving more for retirement. My friend could trim back on her pedicures and create a vacation fund for next year.
But if we don’t take a look, we will never understand our spending and therefore never make changes.
You will be amazed at how fast you can turn your finances around once you start paying closer attention.
This exercise will also help you budget because you have a much clearer picture.
Now that you understand your spending patterns, where you spent your money for a month, where you can trim and reallocate. Once you cut spending, you will immediately see cash free up to save for an emergency fund, pay off debt, save for the future and become financially secure.
Managing your money with knowledge and confidence – the most straightforward way to financial success.
Ready to create a budget? These 5 steps will get you started.